MoneyMagpie

Dec 03

12 Things That Might Be Lowering Your Credit Score (and How to Avoid Them)

Reading Time: 11 minutes

“It takes many good deeds to build a reputation, and only one bad one to lose it”. Benjamin Franklin

Now I totally get that you might not want to think of the things that are lowering your credit score. It’s depressing, right? But remember this — a bad reputation with credit can be overcome, with the right knowledge. Knowledge is power, after all, and once you know what the possible causes of your credit score troubles are, you’ll have a fighting chance to take control and fix them. So let’s get on with it, shall we? Here are some of the most common offenders, and how to avoid the pitfalls that come along with them

1. Co-Signing on a Loan 

So your best friend, your adult child, your relative — one of them comes to you and asks you to co-sign on their loan. Should you do it? The main thing you need to know is that anything that goes wrong with the account will affect your credit report. The debt will show up on your credit report as if it’s yours. Only sign on as a co-signer if you can afford to make the payments 100% on your own if the person you are co-signing for stops making payments for any reason. Hopefully it doesn’t come to that, but if it does, you need to be sure you could protect your credit by making the payments yourself if necessary.

2. Opening Too Many New Accounts

If you open too many new accounts in a short period, your credit score could take a downward turn. No one can say for certain how much of a downturn it will take — th1S varies a lot depending on your individual credit history. The good news is, for most people, their score should bounce back from this in about three months.

Tip:This factor will affect your score more if you have a thin file. Also, if you already have a very high score, you won’t need to worry about this factor as much since even if your score is lowered a bit, your score will likely still be considered high.

3. Too Many Credit Inquiries at Once

If you need your credit score to stay as high as possible in the near future, don’t cause too many credit checks to be run on you in a short period of time. Every time you apply for new credit, the credit check that results can cause a dip in your credit score. But keep in mind that although the fact that your credit was checked can stay on your report for as long as two years, the decrease in your credit score that results is highly unlikely to last that long — usually it rebounds within a few months. It’s also possible that your score could further decrease because new credit will lower the average age of your credit accounts but this will have more of an impact if you have a thin credit file. And if you already have a good credit score, the impact is highly unlikely to cause you any problems.

So don’t stress about it, ok?

Have you come across the hysteria in some circles about how simply be insignificant. For example, VantageScore only uses credit inquiries to determine 596 of your score’s value — they are one of the least important factors in determining your score.

Here’s the thing. Odds are, the credit card company will only pull your score from one of the three major credit bureausso your score will only dip at one of them.

So to sum all this up, if you will be applying for something really important soon, like a mortgage, and you need your score to be at the maximum possible level for you, then hold off on applying for new credit until after your mortgage is approved and finalized. And say your score is borderline, and you might need to apply for credit of some sort in the next few months. If that’s the case, take into account the fact that your score might dip into any decision as to whether or not applying for new credit now is a good idea. On the other hand, if your score is already quite high, then you may not need to worry about this factor at all.

4. Closing Old Accounts

Unused credit will not lower your credit score, but closing that old account might! Since part of your credit score (15% of FICO, for example) is determined by the average age of your accounts, closing an old credit account could lower your score. The good news is that, often, a credit score can recover from this in as little as three months. Another reason why closing old accounts can lower your score is that it could increase the percentage of available credit that you are using.

For example, Anna has five credit cards, each with a maximum credit limit of $2000, and on average, she charges about $1000 per month in total to her credit cards. She pays off the balance in full when she receives her monthly statement. In this scenario, she has a total of $10,000 in available credit and is using 10% of it each month (1000 divided by 10000, multiplied by 100). Then Anna cancels four of those credit cards because she doesn’t use them very much. She continues to charge $1000 per month to her remaining credit card, but now her total available credit is only $2000. This means she is now using 50% of her available credit. Her credit score drops.

Tips for Credit Card Accounts

If your credit card has an annual fee that is causing you to cancel the account, call the credit card company and see if they will waive the fee in exchange for keeping you as a customer, or give you a different card with the same limit that doesn’t have a fee. If you must close an account, call up another one of your credit card companies and get them to raise the limit on your other card so your total available access to credit remains the same.

Tip:This factor will affect your score more if you have a thin file. Also, if you already have a very high score, you won’t need to worry about this factor as much since even if your score is lowered a bit, your score will likely still be considered high.

5. Increasing Your Balance Owing on Your Credit Card

Increasing a credit card balance can lower your score. And it’s worse if the balance is high for a prolonged period. The effects vary depending on your credit file, but here are a few examples of how your score could be affected. If you have a very high credit score, and you max out a credit card, it could decrease your credit score by 90-110 points. If you have a lower score and do this, they say your score could drop by 55-75 points. However, if you knock your balance down to 30% or less of the allowable limit, your score could bounce back to its original value within as little as two or three months.

6. Missing a Payment

Ok, so it’s pretty much inevitable that at some point in your life, you’re going to miss a payment. Sure, maybe not on purpose, but sometimes life just gets in the way and we forget, right? But try to keep those oversights to an absolute minimum because, depending on the circumstances, a missed payment could lead to a big decrease in your credit score.

If you miss a payment and have a high credit score, your score could drop by as much as 70-100 points. If you have a lower credit score to begin with, your score shouldn’t drop by quite as much, although it could still take a substantial hit. The later you are in making up the missed payment, the worse the effects on your score.

A rule of thumb is that the effects of a missed payment on your credit score will go away after two years.

7. Bad Debts

If you’re ever in the unfortunate position to be fighting over a contested account with a creditor, it’s often in your best interest to pay it now and fight for a refund later. Now, by all means, put off paying for a while if you know you have time to fight it before they send it to collections or report a missed payment directly to the credit bureaus. All I’m saying is if they’re threatening to send it to collections or report it right now, you ought to strongly consider just paying it. Because if you don’t pay it, and it ends up being sent to a collections agency or reported as a missed payment to the credit bureaus, this will be a black mark on your credit report that could remain for as long as seven years.

So I’m sure you already knew that having one of your debts sent to collections is bad for your credit. But did you know just HOW bad it is? First, if someone sends a debt that you owe to a collection agency, it can damage your credit report for as long as seven years, even after you pay it off. That’s crazy long, is all I can say! And just wait until you hear this next story. Things can get even crazier!

Mike had a dispute with a furniture store over the amount he owed to them. They sent it to collections, but he couldn’t afford to pay them since he lost his job. He was intimidated by the tone of the letters and phone calls he was getting, so he ignored them. And then he forgot about it after he moved and the letters from the collection agency stopped showing up for a while.

After seven years, he was delighted to see that that old debt finally stopped showing up on his credit report. Well, get this. He just moved into a new home, started a new, better- paying job, and he gets a phone call from the collection agency over that old debt. He figures he’ll make good on the debt. He can afford it now, after all, so why not?! Turns out that after doing that, the old bad debt shows up on his credit report again! Because it shows up for seven years after the date of the last activity on the account.

So, the moral of this story is, if you have a bad debt that you know in your heart of hearts you ought to pay, then take care of it sooner rather than later. Contact whoever it is that you owe money to and arrange a payment plan. Or see if you can get a loan from your bank to cover the debt repayment. Try your best. I know things don’t always work out as well as we’d like, but making a few phone calls to find out what options are available to you now could save you from a nasty surprise a few years down the line.

 

Bankruptcy

Bankruptcies show up on your credit report for a very long time. Chapter 7, 11, and 12 bankruptcies can show up for as long as 10 years, and Chapter 13 bankruptcies usually remain on your credit report for seven years after they’ve been paid off, or 10 years if you failed to complete it. Chapter 7 and 13 bankruptcies have a similar effect on lowering your FICO score because research shows that, on average, people who file for these kinds of bankruptcies have equal creditworthiness

Tax Liens

Even after you’ve paid them off, tax liens can remain on your credit report for seven to ten years, depending on what state you live in. Unpaid tax liens will remain on your credit report indefinitely in many jurisdictions.

Lawsuits and Judgements

A judgement is the official decision of a court in regards to a lawsuit. If a court decides that you owe someone money, this judgement against you can remain on your credit report for seven years once filed.

Foreclosures and Short Sales

Foreclosures and short sales are both considered serious delinquencies and will damage your FICO score.

Repossession

As tempting as it might be to have your payment troubles end by simply allowing the lender to take back whatever the item is that you are making payments on, resist! A repossession could end up showing up on your credit report as a bad debt (even though the repossession settled it), and lead to a lower credit score.

Unpaid Child Support

Child support payments that aren’t paid can remain as bad debts on your credit report indefinitely, or until you clear them up.

Random Troubles You Should Look Out For

Even simple things like a parking ticket you forgot to pay could end up with a collections agency and appear on your credit report for seven years after you settle the debt. When you move, be sure to pay off all utility accounts in full (cable, internet, telephone, electricity, et cetera), since they could also be sent to collections if you forget and, you guessed it, that will be a black mark on your credit report.

If someone garnishes your wages (also known as a wage attachment), this can also damage your credit score. Do everything possible to avoid having your wages garnished for any reason. Here are some of the more common reasons why people have their wages garnished, some of which don’t even require a court order:

  • Child support payments
  • Alimony payments
  • Student loan payments
  • Unpaid taxes
  • Unpaid consumer debt such as from credit cards

 

Keep in mind that wages are not usually automatically garnished for those kinds of debts — garnishment is typically used as a last-ditch effort to get money owed. So as long as you pay your debts on time, whether support payments or taxes, odds are high that you’ll never experience having your wages garnished.

8. Timing Is Everything

Don’t apply for any new loans or credit cards if you need your credit score to remain at its maximum possible score for the near future. For example, if you’ll be applying for a mortgage next month, I wouldn’t recommend that you apply for three new credit cards for their amazing sign-on bonuses. Typically, whenever you apply for new debt whether a loan or a credit card, your credit score will take a temporary dip due to the credit check that will be run on you. If your credit score dips too low, you may end up getting penalized by a higher interest rate on that mortgage you want, or worse, being denied altogether!

A rule of thumb is to avoid applying for any unnecessary new credit in the six to twelve months leading up to your mortgage application. Everyone’s situation is different though, so if in doubt, check with a reputable credit repair service or company, or even the loans officer at your bank.

9. Finance Company Loans

Finance company loans can affect your credit report differently than the loan that your local bank or credit union gives you. This is largely because finance company loans are often targeted at consumers with poor credit so on average, consumers who use them tend to be considered a higher lending risk. So guess what the credit scoring agencies do with this info?

They may associate users of finance company loans with those who are a higher credit risk. As a result, if you use a finance company for your next loan, you may be causing your credit score to decrease. I recommend that you avoid these types of lenders if at all possible, and instead, stick with your local bank or credit union for your next loan.

Be wary of the following types of loans — they may be finance company loans which could lower your score:

  • Furniture store payment plans
  • Electronics store payment plans
  • Loans from companies that specialize in lending to people with bad credit
  • Some car loans

Whenever the lender for any of the above is not a proper bank or credit union, there is a chance it is a finance company loan. Be on guard! The more of those types of loans you have on your credit report, the more likely they are to have a negative impact on your score. The most simple solution is to avoid these kinds of loans altogether.

10. Transferring Credit Card Balances Too Often

While it’s generally considered harmless to transfer a credit card balance to another card to take advantage of a lower rate once, doing it repeatedly will look bad on your credit report. So by all means take advantage of that lower interest rate, but choose wisely so you only have to do it once.

11. Incomplete Files

Usually the credit agencies are pretty good at figuring out who you are, despite the fact that your name may have changed due to marriage or divorce, or that you may sometimes use your middle initials and other times not. But if you’re unlucky, they may make a mistake and fragment your file — for example, putting everything under your maiden name in one file, and everything in your married name under another. Or putting everything under your old address in one file, and everything since you moved to different state in a brand new file.

Depending on your circumstances, this could thin out your file so much that you end up with a lower score than you would have if everything was in a single file, as it’s supposed to be. So if you check your credit report and find more than one file for yourself, contact the affected agency immediately to start the process of fixing this.

12. Fraud and Identity Theft

If you’ve been the victim of identity theft, the perpetrator may have trashed your credit score in the process. Take steps immediately to put a stop to it, and protect your accounts:

  • Contact all three of the major credit bureaus to inform them of the fraud (Equifax, Experian, and TransUnion).
  • Ask one of the major credit bureaus to put a fraud alert on your account (this alert will then be automatically put on your account at all three bureaus).
  • Contact the police and ask them to file a police report.
  • Contact the Federal Trade Commission’s identity theft hotline at 877-438 4338 to report the fraud.

Check your credit report at all three major credit bureaus.

  • Freeze fraudulent accounts.
  • Consider filing an Active Duty Alert — this will stop pre-approved credit offers for two years, thus making it harder for an identity thief to get credit in your name.
  • Keep meticulous records of all communication on this matter.

 

If you are the victim of identity theft, I highly recommend you check out the Federal Trade Commission’s website on the topic here: https://www.identitytheft.gov. I’ve provided you with a quick summary of what to do, but this website will take you by the hand and lead you through all of the required steps in more detail.

Summing up

The good news is, now that you’ve armed yourself with intel on credit score pitfalls to avoid, you’ve increased your chances of achieving, and keeping, a high score!

“Perseverance, secret of all triumphs”. Victor Hugo

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