Your credit score is vitally important to your future financial success. Indeed, those three little numbers can ultimately determine whether or not you are able to get a mortgage, buy a new car, and what sort of interest rates will be available to you. However, many things can hurt your credit score. Some are obvious – others, not so much. Here is an overview of some of these factors.
Late or Missed Payments
This might be the most obvious of all the factors, and probably among the most damning. Your payment history is 35% of your FICO score. As such, nothing is more important to your credit history than making payments on time. Late or missed payments can result in a huge dent in your credit score. This can also lead to additional actions, such as foreclosure, eviction or repossession, and this can also be highly damaging to your credit score.
Using Too Much Of Your Overall Credit
Credit utilization is 30% of your FICO score. This means how much of your overall credit limit you use. Keeping your credit low and regularly paying off your credit card balances can help to keep your credit utilization rate low, thus increasing your score. However, if you don’t make complete payments, or if you keep adding to your credit use, you’re going to see your credit utilization rate increase. This will negatively impact your score.
Having Credit Minimums that are Set Too Low
This item is also related to credit utilization. Remember, your credit utilization rate is a function of two numbers: How much debt you have, and what your overall limit is. If your limit is set too low, your credit utilization rate may seem artificially high. Accordingly, you may want to ask your credit card companies to increase your overall limits. Even if you never use them, this will still decrease your credit utilization rate.
Yeah, this one stinks, mainly because there’s nothing you can do about it!
Your credit history is 15% of your total score. The longer you pay, and the more on-time payments you make, the more your credit report improves. However, if you are young, you simply won’t have had the chance to benefit from a long credit history. As such, there is nothing you can do to improve your credit history except continue to use your credit cards responsibly and make your payments on-time.
Canceling A Credit Card
You may think that canceling a barely used credit card would be good for your credit history. However, that’s not the case. Canceling a credit card will actually result in a higher credit utilization rate because canceling it will lower your overall credit available. As such, canceling a credit card results in a lower credit score.
Some credit cards come with annual fees, and many have found that it’s simply not worth keeping some of these cards. Rather than cancel the card entirely, call your credit card company and see if there are fee-free versions of the same card. These will certainly not have the same benefit as the fee-version of the card, but this will allow you to keep the credit card open without any expenses. This way, you will still have access to the credit card if you need it, while also being able to maintain your current credit utilization rate.
Too Many Hard Inquiries
Hard inquiries are the type of credit inquiry that occurs when you apply for a new loan or line of credit. Lenders will conduct hard inquiries to determine your overall risk to them as a company. They are necessary whenever you take out a new loan.
There is nothing necessarily wrong with a hard inquiry, and they are requirements of certain loans or lines of credit. As such, you shouldn’t hesitate to open a new loan that you need in order to avoid a hard inquiry. However, too many hard inquiries can create an impression that you are actively and rapidly seeking to expand your credit, and this may send up red flags to credit companies that you may not be able to pay back your loans.
There’s good news, however: Hard inquiries usually don’t affect your score for more than a few months. As such, you shouldn’t hesitate to take out a loan based on the prospect of a hard inquiry alone.