7 Things You Didn't Know That Can Hurt Your Credit Score
Before the computer era, consumers would go to their local banker and provide information on their assets and debts to show that they could afford the loan they were seeking.
In the 1970s, credit scores began being used. They’re based on consumers’ credit histories and estimate the probability consumers will pay back their loans.
The most widely used credit score is the FICO score. Created by the Fair Isaac Corp., FICO scores are three numbers ranging from 300 to 850. A score of 720 is considered good. Consumers with lower scores may be charged higher interest rates or denied loans.
FICO scores are based on these criteria: payment history, 35 percent; outstanding balances, 30 percent; length of credit history, 15 percent; new credit, 10 percent; and types of credit, 10 percent.
Most people know that late payments, collection agency activity, a home foreclosure or a bankruptcy will lower a credit score.
Here are some lesser-known items that also could reduce your credit score:
Three credit bureaus track your credit activities: Equifax, TransUnion and Experian. They get reports from your creditors about what you owe and how you pay.
If you close accounts, your credit score could be affected. FICO scores are sensitive to how much activity occurs in a consumer’s credit history record, the total amount of credit a consumer has and the length of the consumer's credit history.
A good plan for closing some accounts is to pay down other balances first, close the new accounts first and keep some accounts open.
High Credit Card Balances
About a third of your credit score is based on your outstanding debt. If you owe more than 30 percent of the limit of what you can charge on your credit cards, your credit score could be affected. It's a good idea to watch your balances. For example, you should not charge more than $3,000 on a card with a $10,000 limit.
Too Many Credit Cards Or Loans
Applying for too many credit cards or loans during a short period of time can trigger a reduction in your FICO score. It’s good to spread out your applications over a two- to three-week period.
If you’re applying for a car loan or a mortgage at a number of lenders, do it within a 14- to 30-day period because the FICO model counts these applications as one inquiry.
Other People’s Debt
If you’re a co-signer on a loan or credit card with an adult child, friend or relative, it will cause problems with your credit score if they don’t pay the amount owed.
Retail Credit Cards
Be careful when your favorite department or big-box store offers you a 10 or 15 percent reduction on your purchase if you sign up for a credit card with them. Retail credit cards aren’t looked on as favorably as installment debt, such as an auto loan. It could reduce your credit score.
If a scammer gets your private information and maxes out your credit cards, your credit score will dive. However, credit bureaus have a procedure for removing information based on fraud. Once that’s taken care of, your credit score will go back to an accurate rating.
Note that if you’re a victim of identity theft, you need to take action right away. Put a freeze on your credit report at all three credit bureaus, contact the police and let the credit bureaus know so they can start removing fraudulent information.
If you have high credit card debt, you may want to talk with your creditors about reducing your interest rate and other help. Your credit score may go down the first year because you’re paying off accounts and closing them. However, it will go up again as creditors report you’re paying your balances on time.
If you’re knowledgeable about how credit scores are used, it’s more likely you’ll avoid problems when you apply for a loan.
Part of being credit score savvy is reviewing your credit history each year so that you can correct any errors that may affect your FICO score. AnnualCreditReport.com is the only authorized source for the free annual credit report that’s yours under the law. Watch out for companies which have similar names that charge money.
While it may be helpful to know your FICO score, you’ll probably have to pay for it. And, it’s possible that the score you buy isn’t that accurate.
A survey by Consumer Reports showed that 11 credit scores they bought for a consumer varied within a range of 72 points.
Another way to get your FICO score is to ask a lender you’ve worked with for it. Some will provide the information, while others refuse to give it out.