Your credit score is a living, breathing thing that can change from day to day. Even the daily actions you might take in an effort to reduce your monthly payments can negatively impact your credit rating.
A credit score is basically a snapshot of your current creditworthiness translated into a number. The higher the number, the more creditworthy you are, making it easier to get a loan at a lower interest rate. Agencies use strict formulas to make that translation. Every financial action you take is plugged into the appropriate formula and often results in a positive or negative change in your score. As a credit consumer, though, doing something that might seem like it would improve your credit snapshot could actually harm it.
Here are five ways you might be lowering your score without realizing it.
Closing an Old Credit Card Account
Sometimes you accumulate credit cards you just don’t use or that you haven’t used in a long time. Perhaps you have a card from a department store chain at which you haven’t shopped in years. You might be tempted to tell the store to close the account. Credit agencies actually factor in the age of accounts (viewing older accounts more favorably than newer ones) when determining your creditworthiness, so closing older accounts could lower your score. Additionally, agencies weigh the diversity of your credit accounts: the more variety, the better. Even if you haven’t charged on an account for a while, it probably makes sense to leave it open.
Loading Up or Maxing Out a Credit Card
Think before your charge. Although it may seem sensible to put all your purchases on one credit card, bringing its balance close or to the limit can impact your score. Never run a credit-card balance above 50 percent of its limit.
Making Multiple Applications for Credit
Applying for credit isn’t like applying to college, where the chances of acceptance increase with the number of applications sent out. When applying for credit, each application typically triggers a credit inquiry at the national credit bureaus. One or two inquiries in a short period won’t have much impact on your credit rating, but a surge of inquiries could cause a dip in your score.
Taking Advantage of a Fixed-Month, Zero-Interest-Rate Offer
Unless it’s offered through a credit card you already have, accepting a fixed-month, zero-interest offer often negatively affects your score.
Let’s say you’re buying a $600 flat-screen TV at the local electronics store offering a 6-month, zero-interest loan with approved credit. If you make six equal monthly payments of $100, you won’t pay any interest on the loan.
But taking advantage of such an offer can lower your score in two ways. First, it’ll be reported to the credit bureaus as a new loan with a $600 limit. Second, the limit will initially show as maxed out, affecting your overall balance-to-available-credit ratio. Both can have a negative pull on scores.
Ignoring a Parking Ticket
To reduce their number of outstanding, unpaid parking tickets, several municipalities around the U.S. are turning these tickets over to collection agencies. Collection agencies often report their accounts to the national credit bureaus, meaning that if you have an outstanding ticket, it could lower your credit score.
What it means to you: Ensure that any action you take involving your credit, credit cards or outstanding balances will actually improve your creditworthiness.