|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Fact or Fiction- What Actions Really Do Affect Your Credit?
As the banks continue to emerge from the financial crisis of a few years ago, it appears that credit is loosening for an increasing number of borrowers. Yet, we continue to feel as if we’re walking a tight rope when it comes to maintaining our credit standing; and, rightly so, because, while it can take months and years to build up your credit score, it takes only a couple of missteps for it to plunge again. Often times, it’s a seemingly innocent action taken by a borrower with good intentions that can lead to a drop in their credit score.
Most people know of the obvious score killers, such as missed payments and maxing out credit cards. But, here are some ways your score can be adversely affected without your realizing it:
Paying Off Your Debt
It may seem counterintuitive that by paying off your debt you could actually hurt your credit score, but it can. 30 percent of your credit score is based on what’s called “credit utilization” which is a ratio of credit used to available credit. Anything under 30 percent utilization will increase your score, however, if it drops to zero, it is no longer scored, so your score can actually decline. Go figure.
Closing Credit Accounts
People trying to clean up their credit reports will sometimes scrape off some older, inactive accounts or simply close some credit accounts to reduce the temptation of borrowings. Again, while the intention is good, it can have the opposite effect on your credit score. 15 percent of your score is based on the length of your payment history, and, if you close established accounts that are in good standing, it can narrow your history. It also could skew your credit utilization score when accounts with zero balances are closed leaving more accounts with credit balances.
You also need to be aware of account closings by the lender. More banks are closing accounts that have been inactive for a period of time and that can hurt your score in the same way as if you closed the account. Better to remain active, even if you use the card to buy a carton of milk from time to time.
Opening an Installment Account
When purchasing furniture or a large appliance, it can seem fairly straightforward and harmless to take one of those “same as cash” loan offers right from the store. The problem is that many of these installment loans are funded by “subprime” lenders which are not viewed in the same light as “prime” lenders by the credit bureaus. If you have too many subprime loans in relation to prime loans on your report, it can hurt your score.
Stealth Credit Inquiries
Most borrowers have learned that it’s not a good idea to apply for too many credit cards or loans within a short period of time. More than one or two in a three to six month period can negatively affect your score. What many people don’t know is that applications for a new cell phone service or auto insurance policy can also trigger credit inquiries that can have the same negative effect.
Not Monitoring Your Credit
Your credit report records every credit activity that occurs on a daily basis, and, while you are probably aware of most of them, it’s easy to miss something that can damage your score. The most common are reporting errors by the credit bureaus. Sometimes accounts or names get crossed and an item can show up on your report that doesn’t belong. It could also be an error of omission if a payment or an increased credit limit is not reported. It’s also not uncommon for the lender to change your credit limit without warning, and, if it is lowered, it could adversely impact your credit utilization score. Usually you are given notice of such a change, but even so, you need to check your report to see how it affects your credit utilization ratio.
Managing your credit and maintaining a high credit score are no longer just side activities. Lenders, the credit reporting agencies and their convoluted scoring systems have seen to that. It does require forethought and constant monitoring even if you think you are on the right track.
Read other Financial Tips