4 Surprising Ways To Damage Your Credit Score

by Ron Haynes

GFC_468x60_3in1-DoYouKnowv5

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.

(Get your free credit score at GoFreeCredit.com)

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!

About the author

Ron Haynes has written 1001 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


If you enjoyed what you just read and would like to get FREE email updates with the freshest articles from The Wisdom Journal delivered right to your inbox, subscribe today! It's ridiculously easy and you can unsubscribe at any time. Since your email address is never sold or abused, you can subscribe with confidence, PLUS you'll get free reports/guides/eBooks, subscriber only benefits, and other perks.


{ 7 comments }

Jenna

Just found your blog by way of the Financial Bloggers Conference. Excited to be following what you have to say now!

Ron

Glad to hear that! I am so looking forward to the conference!

Grace L.

On the note of not applying for credit too often, it helps to know there are different ways applications are viewed. There is a soft pull which you usually aren’t aware of and doesn’t affect your credit score and a hard pull which typically you initiate by requesting a credit card or applying for a loan. The hard pulls or hard inquiries are the ones you want to watch!

Ron

Without a doubt! It’s helpful to ask whether a company does a hard pull or a soft one. Ally Bank is one of those that does a hard pull.

Karen

When you pay only the minimum creditors may regard you as a poor risk because you seem overextended. Not only can paying only the minimum reduce your credit score it can also cost you thousands of dollars over the life of the debt or loan. As you probably know, interest continues to accrue on any outstanding balances. If you aren’t careful you could end up paying twice or even ten times as much as the initial cash price of that great item you just couldn’t pass up. Protecting your credit score requires just a little diligence and a lot of discipline. Families should sit down together to discuss financial goals and plans. When everyone is moving in the same direction it is far easier to get to where you want to go.

Ron

When you think about it, saving for just a little while in order to buy what you would have originally bought on credit gets you the item plus interest rather than the item and the loss of interest.

Edwin @ Cash The Checks

Raising the credit limit to $80,000? Wow they must have really wanted you to accrue some serious debt.

Previous post:

Next post: