By now, you probably know that having a good credit score is an important part of your overall financial well-being. Your credit score helps to determine whether you qualify for loans, such as a car loan or mortgage, and the interest rates you'll pay. Having a solid credit score may also help you save on things like insurance premiums and cell phone plans.
Because credit plays such a significant role in your financial life, it pays to maintain healthy credit habits. You should also understand the actions that can potentially lower your credit score. Let's take a look at some things that could possibly hurt your credit score:
Co-signing on a loan or credit card
Co-signing may seem like a nice way to help a family member or friend with less-than-perfect credit qualify for a loan or get a better rate, but it also comes with some potential consequences. When you co-sign with someone else, you take on responsibility for their debt. The loan will appear on your credit history, and if the borrower is unable to make their payments, you'll be on the line. Missed or late payments can put your good credit at risk. Before co-signing, make sure you can bear the brunt of the loan payments in the event that the original borrow cannot.
Closing old credit cards
You might think it's a good idea to cancel credit cards that you don't use anymore. However, think twice before you call your credit card issuers. Recall that your credit utilization ratio (the percentage of your available credit that you use) is one of the factors used to determine your credit score. The lower your credit utilization ratio, the better. When you cancel a credit card, you may reduce your total available credit amount and raise your credit utilization ratio as a result. Canceling an old card will also shorten the age of your credit history, which also factors into your credit score.
Making late payments
Consistently making late payments on your credit cards or loans is another way to hurt your credit score. Because 35 percent of your score is determined by your payment history, just a few late payments can ding your score. If you're having trouble making payments on time, talk to your credit card issuer about moving your monthly due date. Grouping all or most of your bills together on the same due date can help you plan better and avoid forgetting about a payment.
Applying for multiple credit cards at once
Hard inquiries happen when someone runs a credit check on you, such as when you're applying for a credit card, loan, apartment or even certain jobs. These credit inquiries account for about 10 percent of your credit score, so when you make multiple applications within a short period of time, your credit score may drop. To prevent this, keep credit applications to a minimum and read the fine print on applications for products and services to be sure you're not inadvertently accumulating too many hard inquiries.
Renting a car without a credit card
Need to rent a car? Ideally, you should use a credit card to save time and avoid damaging your credit score. If you don't use a credit card, the rental company will likely do a thorough check to verify your identity and ask for a security deposit. The company may also run a hard inquiry on your credit, which could cause your score to take a hit.
Not checking your credit report
Your credit score may also drop if there's an error on your credit report, or if you've been a victim of fraud or identity theft. The best way to know if any of these issues have affected your score is by checking your credit report. Checking your own credit score does not count as a hard inquiry, and you can view a copy of your report for free from each of the three major credit bureaus once a year by visiting annualcreditreport.com. Don't be in the dark about your credit; keep tabs on your report and look out for anything unusual.
Not using credit at all
In a way, credit is like a game: you have to play to win. In other words, to build credit, you have to use credit. Avoiding credit completely may prevent you from accomplishing basic financial goals, such as renting an apartment, getting an affordable car loan, or buying a home. However, you don't have to max out credit cards in order to reap the benefits of credit. Using credit responsibly – paying bills on time and in full – will help you improve your credit score and credit history. Additionally, you should try to establish a mix of credit accounts; having only credit cards or only loans may lower your score.
At Wright-Patt Credit Union, we're here to help you better understand your credit score and take steps to improve it. Stop by your local Member Center and talk with one of our Financial Coaches. You can also check out our online Financial Success Center to browse our short, interactive videos with over 24 topics designed to help you Save Better, Borrow Smarter and Learn a Lot.