Did You Know These 4 Things Can Hurt Your Credit Score?

credit score

Did You Know These 4 Things Can Hurt Your Credit Score?

When it comes to your financial life, your credit score is one of the most important factors. Banks use your credit score to determine whether or not you qualify for a credit card or loan. It can be used to determine whether or not you have to pay a security deposit. Your insurance providers consider your credit score when determining your insurance rates. 

 

Knowing the things that can boost your credit score can be helpful and important, but you should also have an understanding of what financial activities can hurt your credit score and give you bad credit. 

 

By avoiding these 4 things, you can avoid the side effects of a bad credit score:

 

1. Late Payments 

Even one late payment can cause your credit score to drop. Your payment history on loans and credit balances plays a large role when it comes to calculating your credit score. In addition, late payments can remain on your credit score for several years. Because of this, it’s best to always pay your bills on time.

 

2. Applying For A Lot of Credit All at The Same Time

When you apply for credit, a lender or creditor accesses your credit reports. It is a “hard inquiry,” and will show up on your credit report. Beyond showing up on your credit report, it can also impact your credit scores. By applying for multiple credit accounts in a short time your scores will be affected and lenders will see you as a higher-risk borrower. 

 

However, in certain situations—like if you’re shopping for an auto loan or mortgage or a new utility provider where you’ll be looking at multiple options—multiple inquiries are usually counted as one inquiry over a specific time period. This time period window is usually between 14 to 45 days, but that period could vary. This will allow you to weigh different options and check different lenders in order to find the best loan provider and the best loan terms for you. Be sure to note that this exception doesn’t usually apply to all types of loans, such as credit cards. 

 

3. Having High Debt to Credit Utilization Rates

Your debt to credit utilization ratio is an important factor that is used to calculate your credit score. The ratio is how much of your available credit you are using compared to the total amount available to you that you could be using. As a general rule of thumb, most lenders and creditors like to see a lower debt to credit ratio, below 30%. 

 

While it may seem like a good idea, opening new accounts to reduce your debt to credit ratio isn’t actually a wise decision. This can hurt your credit score by increasing your number of hard inquiries as discussed above. Try to only apply for credit when you actively need it. 

4. Closing a Credit Card Account

While the idea of closing a credit card account that’s paid in full may be tempting, doing so may negatively impact your credit scores. It will impact your debt to credit utilization ratio, and may also affect the mix of credit accounts on your credit reports. Lenders and creditors want to see that you can effectively handle multiple different types of credit accounts over a substantial period of time before they lend to you. 

Bottom Line

While your credit score is extremely important when it comes to getting approved for loans and getting the best interest rates, don’t drive yourself crazy obsessing over what may or may not impact your credit score. If you manage your credit responsibly, you shouldn’t be too worried about your credit score. If your credit score isn’t where you want it to be, our team at Pivotal Wealth can help. Contact us today.

 

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Matt Lovelady is a co-founder and managing vice president of Pivotal Wealth. He has launched multiple businesses in the financial services space and is passionate about helping people become debt-free, build their wealth, and plan effectively for their retirement.