You’ve definitely heard about credit scores, the all-important number that has a profound impact on our ability to make financial decisions. Beyond just those decisions, credit scores are also used by employers, landlords and more, meaning that that little number is also your gateway (or wall) to many life-altering paths. Many people spend their entire lives trying to fix their scores, so let’s make sure you’ve got the knowledge necessary to avoid some credit score pitfalls!
What Makes Up a Score?
Before we take a look at what hurts a score, let’s take a brief look at what makes up your credit score. A credit score is composed of five parts, all of which account for a different percentage of the overall score.
- Payment History (35%)
- Credit Utilization (30%)
- Types of Credit Used (15%)
- New Credit (10%)
- Length of Credit History (10%)
If you’d like a more in-depth explanation on each of these, feel free to visit our blog on the subject! With those numbers in mind, let’s look at nine ways your credit can be negatively impacted.
1) Missing a Payment
It might be obvious, but you definitely want to avoid missing any payments. On top of late fees you may have to pay, missed payments are prominently displayed in your payment history, which as you know, makes up a third of your credit score composition. Missed payments can remain on your credit report for up to seven years after the date of the missed payment.
To avoid missing payments, ensure you can afford your purchases and take advantage of any alerts/payment reminders available to you. Also, make a habit of checking your accounts frequently. A popular strategy is to take a “daily money minute” where you check your finances every day for at least a minute.
If you're a Florida Credit Union member, taking advantage of Bill Pay services can help you automate recurring payments and minimize your chances of missing a payment. Bill Pay is offered through our online and mobile banking platform, FCU Anywhere.
2) Holding High Utilization Balances/Maxing Out a Credit Card
The second largest part of your credit score composition is credit utilization, which is the amount of credit you’re using in comparison to what is available to you
Say the limit on your credit card is $2,500. The general rule of thumb is to keep your credit utilization around 30%, which would be $750. This doesn’t mean that you should expect your score to tank if you use more than 30% of your limit. This would apply in the case that you kept your utilization at high levels, like say 70%, for an extended period, meaning that you were just paying the minimum balance on your credit card month after month while incurring other debts. Taking this approach could signal to potential lenders that you have difficulty paying off high balances.
You should try to pay off credit card debts as early possible, if you’re able, due to the interest you’d be saving in the end. Paying off credit card debt would also mean you have more credit available to make other purchases.
3) Hard Inquiries
A credit inquiry is a request from you or someone else to view your credit score. There are two kinds of requests, soft and hard inquiries. An example of the common soft inquiry is when someone checks their credit score. Another is an employer looking at your credit score as part of the hiring process.
Hard inquiries are tied to credit-related applications such as loans and credit cards. Because loans and credit cards are methods of borrowing money, these kinds of inquiries can hurt your credit score. While their effect can be minor in terms of points lost on your score, making multiple inquiries in a short period can be devastating to your score, a concept we’ll look at further below.
If you have good credit, there might come a day where a friend or family member with a lower credit score may come to you and ask if you’d co-sign with them on a loan. What are the benefits to co-signing?
Co-signing allows someone with challenged credit to be to be approved for things like loans and leases. As an example, many college students living off-campus will co-sign on leases with their parents. So what’s the downside?
As someone who has co-signed on the lease, if your other signee misses payments, you’re just as liable is they are for the late payments and both of you will take the same hit on your credit scores. This is why you have to be very careful with co-signing. You’re usually better off not taking the risk. However, if you’re close to the person and trust them, it’s a great way to help someone in need, or even buy something together!
5) Not Using Your Credit
It might sound somewhat oxymoronic that not using your credit can hurt you, but not using credit means that you have no payment history. If it’s been a long time since you’ve had a loan or something reporting for your credit score, lenders may call into question your experience as a borrower and lack of a consistent track record of payments.
6) Rapid-Fire Applying
Say you’re looking for a mortgage so you can upgrade to a better house. You’re not sure what financial institution to go with, so you apply to a dozen just to be sure. A shotgun approach is bound to pay off, right?
Wrong! While you might think that tossing out many applications is a good idea, this isn’t like applying to college. Remember, applying for loans counts as a hard inquiry against your credit score. A few inquiries won’t lower your score by much, but a larger quantity certainly will.
You also need to remember that financial institutions will see beyond your score, as they’ll have access to your payment and application history. Rapid-fire applying may lead lenders to believe that you’re in a bad financial situation, or are being denied at other places. If other places won’t lend to you, why should they?
If you’re struggling with a bad score, consider researching all of the financial institutions around you and picking one based on your findings. You may want to ask around or consult with people online to see if the institution would be likely to give you a loan. If you’re rejected, it might be a sign that other institutions will do the same, and you should work on your score before trying again.
7) Closing a Credit Card
Another pitfall that might not sound like one is closing a credit card. If you have a credit card you’re not actively using, it’s better to leave it open. Credit history is an important part of your credit score (10% of it), and closing old credit cards will make your history look shorter than it actually is. If you’re able to avoid a monthly fee on the card and can simply keep it open, do so and take advantage of this extra line of credit if you need it later on.
8) Too Few Types of Credit
As you may recall, the types of credit you use make up 15% of your score. Only having a single type of credit, like a credit card, can negatively influence your score. The reason is that having a variety of credit types, like loans, credit cards and more will make you appear as a more experienced borrower. It demonstrates your experience with different loan types, your ability to make payments in a timely manner, and indicates you may be a good applicant to approve.
9) Not Checking Your Score
While not checking your score doesn’t actually lower your credit score, not knowing your score may cause you to make financial decisions that might actually lower it. There’s no excuse not to check, as the Fair Credit Reporting Act provides you with the right to get a free report from each of the big three credit reporting bureaus (Equifax, Experian, and TransUnion) every 12 months. You can accomplish this here. In fact, because of the COVID-19 pandemic, those three credit reporting bureaus are offering free weekly online reports through April 2021!
We can also check your score for you! As a member of the credit union, you’re entitled to a free credit report analysis. Call or stop by your local branch to take advantage of this free service. The tools are all available to you, it's up to you to be proactive about your credit score!
Florida Credit Union is a full-service financial institution. Founded in 1954 as the Alachua County Teachers’ Credit Union, FCU now services over 111,000 members in 45 counties throughout North and Central Florida. For more information on the services we provide, visit FLCU.org or call us at 1-800-284-1144.