Things have changed in the world of credit scores. Back just a few years ago, receiving credit was easy and credit scores were inflated because credit issuers were willing to give almost anyone a ridiculously high credit limit. At one point, I had a credit card with an $80,000 limit. No one asked the obvious question: Why would I need an $80,000 limit on any crazy card?
I had never used more than $1,500 on that card so my credit utilization ratio (the amount of credit used as a percentage of credit available) was awesome. Once the economy began to tank, the issuer decided to lower my limit to $20,000 and begin charging me an annual fee. That’s when I made my first mistake and damaged my own score.
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How to damage your credit score
Out of anger at being charged an annual fee for the first time, I made a quick phone call to customer service, complained, was told “too bad,” complained to a supervisor, was told “tough,” and so I threatened to close the account … and they promptly called my bluff. Lesson: don’t bluff in a recession …
1. SURPRISE! You damage your credit score when you close old accounts
That account had been opened for over a decade and by closing it, I hurt the credit history part of my credit score as well as what little credit utilization I could have had. Closing an account may make financial sense for you personally, but in the grand scheme of things, credit scoring companies view it as a negative.
2. SURPRISE! You damage your credit score when you don’t use an account
Not using an open credit account isn’t the way to go either. Credit issuers don’t like allowing customers access to huge sums of money that never gets used. Lately lenders have taken a use it or lose it attitude – and like it was in my case, lose it was their preference.
If an open account remains unused for a long enough period of time, the company may stop reporting it to the credit bureaus and unreported accounts don’t (can’t?) contribute to your available credit, which affects your credit utilization ratio (.
3. SURPRISE! You damage your credit score by overuse too
Overusing credit, running your credit up to the limit and keeping it there has a detrimental effect on your overall credit score too. Lenders are mostly looking for a balanced customer, one that uses credit regularly … but not too much, responsibly … but not a tee-totaler. Most credit scoring companies prefer to see small balances on a larger number of cards rather than a big balance on one card. But be careful here as well – you might run into problem #4.
4. SURPRISE! You damage your credit score by applying for credit too much
Apparently, this balance thing is serious. A new credit account doesn’t mean just a shiny new credit card burning a hole in your wallet; it means a lower credit score – at least in the short run. The reasons are twofold:
First, new credit accounts lower the average age of your credit history. If you’ve had one card for 10 years, that’s 120 months of credit. Apply for and receive 3 new cards or accounts and your average credit history dives to 30 months. That’s a huge decrease in credit history.
Second, you have all those inquiries. Credit issuers don’t like it when you appear desperate to get more credit and applying for multiple cards or accounts within a relatively short period makes them really nervous. Banks may claim they want to lend money, but it looks like they’d rather just buy other banks using taxpayer funds! Ironically, credit issuers aren’t sure they want to lend money to people who need to borrow it, so don’t appear desperate by applying for multiple accounts over the course of a month or so.
My credit score DID recover
By paying my bills on time and in full, not closing any more accounts, not applying excessively for more credit (none other than a mortgage refinance actually), my score eventually went up to 804!