Credit Score

9 Mistakes That Kill Your Credit

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Credit can be a tricky thing — some behaviors are obviously harmful to your credit, like paying late (or not at all), or maxing out your cards. But some mistakes aren’t all that obvious, and in fact some actions that might seem beneficial can actually have a terrible impact on your credit.  We’ve compiled the biggest mistakes to help you determine what might be killing your credit.

1. Closing Credit Cards Accounts

Some of you may wonder why closing credit cards is number one on this list — even above missing payments. In fact, closing credit cards is almost as bad of an idea to boost your credit scores as missing your payments, but it is also a clear number one on the list of credit myths. It is perhaps the most common piece of misguided advice that consumers are given when they ask, “How can I increase my credit score?” But here’s the reality: Closing credit card accounts will not increase your credit score, even if you don’t use the cards anymore. Here’s why:

A closed account will fall off your credit report sooner than an open one - Lenders and credit reporting agencies have to follow certain rules determining how long information can remain on the credit report. In most cases negative credit information will remain on your credit files for seven years from the date the debt first became delinquent. Positive credit information can remain indefinitely, however, closed accounts in good standing are usually removed from the credit report within ten years after closing. And while credit scores continues to benefit from the positive history associated with an account for as long as it remains on the credit report – open or closed – once that account is removed from the credit report all of that good history is gone.

Why is this a bad thing? Because a credit score favors a long credit history, as the length of your credit history counts for about 15% of a FICO score. Consumers with a younger credit history tend to be seen as more risky borrowers than consumers who have had credit for many years.  So hang onto those old accounts if you can by leaving them open.

You will hurt your “utilization” measurements - In the short run this is significantly more important than your closed accounts eventually falling off your credit reports. “Revolving utilization” is the amount of your revolving credit card limits that you are currently using. For example, if you have an open credit card with a $2,000 credit limit and a $1,000 balance then you are 50% “utilized” on that account because you’re using half of the credit limit. This measurement makes up almost 30% of your score, and is almost as important to your credit scores as making your payments on time. As this percentage increases, your credit score decreases.

2. Missing Payments

Missing payments is number two on the list because it doesn’t take a credit expert to tell you that missing payments is a bad thing. It’s common sense, unlike closing a credit card account. The explanation why missing payments is a huge mistake is also fairly obvious. Credit scores look at your credit history to see how you have managed your current and past credit obligations in an effort to predict how likely you are to miss payments in the future. The most powerful “predictor” of future late payments is having missed payments in the past. There are three ways that missing payments can hurt your credit scores. They are:

  • How Frequent Are Your Late Payments? – If you miss payments frequently then you may be penalized more severely than someone who misses payments infrequently.
  • How Recent Are Your Late Payments? – Since scoring models are designed to predict how you are going to pay your bills in the future, the more recent the late payment, the worse it is for your score.  For example, if your late payments occurred in the most recent two years, then statistically you are more likely to miss payments in the next two years than someone without any recent late payments.
  • How Severe Are Your Late Payments? – The severity of your late payment also plays a big part in your credit scores. Consumers who have missed payments by only a few weeks and then bring their payments up to date are likely to score better than consumers who have payments that are 90 days past due or worse. If you have late payments, it is in your best interest to do all that you can to bring them up to date as soon as possible.

3. Settling With Your Lender on a Past Due Account

“Settling” is a term used in the consumer credit industry that means accepting less than the amount you owe on an account. For example, if you owe a credit card company $10,000 but you can’t pay them the full amount, then they will likely make you a deal for less than that full amount. They have “settled” for less than the full amount, which is likely much less than you contractually owe them. This may seem like a good idea because you are happy that you didn’t have to pay the full amount. However, the lender will report that remaining amount to the credit bureaus as a negative item. This remaining amount is called the “deficiency balance.” A deficiency balance is considered just as negatively by credit scoring models as any other severe late payments. If you can arrange a deal with your lender so that they will NOT report the deficiency balance then that will be your best course of action. If they will not agree to this, then work to find a way to pay them in full or your credit will suffer for 7 years.

4. Over-Utilization of Your Available Credit Card Limits

Having high balances on your credit cards are likely to cause your credit scores to go down (as we talked about in Mistake #1). In this situation, your best bet would be to use your cards sparingly and pay them down as much as possible each month. If paying your cards off every month is unrealistic, try your best to reduce that percentage as much as possible, and your score should slowly work its way back up. There is no magic target to shoot at, but it’s safe to say that the lower the percentage the better.

5. Excessively Shopping for Credit

Every time you fill out a credit application, you are giving the lender permission to access your credit reports. When they access your credit reports they automatically post what is called an “inquiry.” The inquiry is a record of who pulled your credit report and on what date. Federal law requires that the inquiry remain on the report for 24 months, however, credit scores only look at inquiries less than one year old.

Inquiries are used by credit scoring models to determine whether or not someone is shopping for credit. It is a statistical fact that consumers who have more inquiries tend to be higher credit risks than consumers with fewer inquiries. Thus, the more inquiries you have the more points you may lose on your credit scores.

6. Thinking That All Credit Scores Are the Same

Credit scoring is already a confusing enough topic to understand. Add to the mix that there are as many different types of credit scores as there are soft drinks, and it gets really confusing. The most commonly used credit score is a credit bureau risk score. A credit bureau risk score is designed to assist lenders in predicting whether or not a consumer will pay their bills on time in the future.

There are many different places where consumers can purchase their credit reports and credit scores, however, not all of the scores being sold are the same. On the surface this might not seem like a big deal, but it certainly can be. For example, if you are in the market for a new car and you purchase an “educational” (sold to consumers, but not used by lenders) or other type of credit score ahead of time for your own information, the score you get might be different from the score the lender is looking at. Every lender has different lending standards, so the same score may earn you a good deal with one lender but not with another.

7. Thinking That All Credit Scores Predict the Same Thing

Adding to the confusion in number six above is the fact that there are models that predict other things than general credit risk. Scoring models can be built to predict almost anything including:

  • Insurance Risk – That’s right. Some insurance companies use credit scoring models to predict whether or not you are likely to file an auto or homeowner’s insurance claim. A poor insurance score may mean that you will pay higher premiums.
  • Response Rates – If you receive pre-approved offers of credit in the mail everyday, it’s not random. You have been selected from hundreds of millions of other consumers to receive that offer because you have a “Response Score” that indicates you are more likely to respond to that offer than someone else.
  • Revenue Potential – Credit card companies also use revenue scoring models to predict whether or not you will use their credit card and, hopefully, generate revenue for them.
  • Collectability – For those of you who have collections on your credit reports, collection agencies assigned to collect those past due debts may be scoring you to determine whether or not you are likely to repay your collection debt sooner than someone else.
  • Bankruptcy Potential – Bankruptcy scores predict the likelihood that you will file for personal bankruptcy. A poor bankruptcy score could cause your credit applications to be declined.
  • Fraud Potential – Amazingly sophisticated, these models actually can predict whether or not a purchase you are trying to make with a credit card is likely to be fraudulent or not. What’s even more amazing is that it takes about 2 minutes to complete your check-out at a store, and in this short amount of time you may have been scored to see whether or not the retailer should accept your credit card.

[Related Article: The First Thing You Must Do Before Paying Off Debt]

8. Not Understanding Your Rights Under the Fair Credit Reporting Act

This act, commonly referred to as the “FCRA,” is a list of credit reporting rules and regulations that govern lenders and the credit reporting agencies. You should become familiar with your rights — including the “permissible purposes” under which your credit reports can be accessed, your rights to dispute errors on your credit reports, and your right to a free copy of your credit reports from each of the three credit reporting agencies. See the Federal Trade Commission site for more info.

9. Not Knowing That You Have 3 Credit Reports & Corresponding Credit Scores

Most consumers understand that they have a credit report. However, many do not know that they have three credit reports compiled and maintained by three separate and competing companies called “credit reporting agencies.” These companies are essentially repositories that store your credit history and sell it to lenders and consumers. The three largest of these companies are: Equifax, Experian and TransUnion.

 Each agency maintains credit files on more than 250,000,000 consumers. They do not share credit information with each other, so you are likely to have a unique credit report at each of these agencies. In turn, each of these credit reports can be used to calculate many different credit scores. Do not assume that your credit reports and scores are all the same.

If you’re concerned about where your credit currently stands, you can check your three credit reports for free once a year. If you’d like to monitor your credit more regularly, Credit.com’s free Credit Report Card provides you with an easy to understand breakdown of the information in your credit report using letter grades, along with two free credit scores that are updated monthly.

More on Credit Reports and Credit Scores:

  • DAS

    I was checking my credit score on credit.com and notice it dropped 25 points. Never been late and have not applied for any new credit in 90 days. A couple of months ago it went up have the 60 days past of me applying for new credit over the holidays and now it’s down.

  • http://credit.com John Drillock

    I’m confused about all these credit reporting agencies as to which one is used for what purpose. Trans Union, Experian, Equifax, Advantage, FICO. Which one is most widely used but better yet, which one is m ore likely to be used by what type of financial instituion,.

  • Barry Paperno

    Hi John, First, of those companies you mentioned, only three are actually credit reporting agencies: TransUnion, Experian and Equifax. They all do the same things -collect data, provide credit reports, calculate credit scores – with Experian and Equifax being the most widely used of the three.

    All are used by all types of financial institutions, with many using all three to at least some degree. That is, lenders of all types – credit card, mortgage, auto, student, etc. – tend to use different CRAs for different products, portfolios and regions. So, for example, a lender may use Experian for their auto lending in the Western region, while using Equifax for auto lending in the East, and mortgage lending in the Mid-West. This same lender may also use TransUnion for their credit card portfolios in the South region, Equifax in the Northeast and Experian in the Mid-West.

    VantageScore (what I think you meant by “Advantage”) and FICO are analytic companies that develop the credit scoring models the three CRAs use to calculate the credit scores they sell to lenders and consumers. VantageScore is owned by the three agencies, while FICO is an independent company.

    Hope that clarifies things a bit.

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  • Michele Brissette

    I have a credit card I just paid off early this year (have not used the card in 3 years and don’t even have the actual card any longer). I received a letter saying I would be charged a $59 annual fee next month if my card remains open. But I am being told that closing a credit account will negatively affect my credit. I am not planning on using this card and they will not waive the fee. I’m on a strict budget (taking care of my three step sons and financial obligations to my husbands ex wife) so I really don’t want to pay a fee for a card I won’t be using. is there anything I can do differently?

  • JD

    I just looked at my credit reports as I am wanting to buy a car. I got a very detailed report from Experian. Equifax was less detailed. Neither gave me an upfront ‘score’ number and Equifax wanted me to pay $8 in order to obtain this score, despite the free report. I thought the score was supposed to be free (once a year, anyway!)

    • Credit.com

      JD — The annual freebie is specific to credit reports, the credit scores are not free. There are free educational services like the Credit Report Card that will provide a free credit score. Otherwise, you’ll have to pay to get your score. It’s also important to understand the differences in scores — this article will explain why the credit score your lender pulls won’t necessarily look like the score you obtain online or purchase from the bureaus: Three Reasons Why Your Free Credit Score Looks Wrong

  • Carolyn

    Hi Michele. It’s best that you pay the fee only if your interest lie in keeping and increasing your credit score. If not, this unused card will eventually drop off, even though you never missed a payment and paid it off early. Paying the fee is an investment to you if you intend to purchase a home, refinance your existing mortgage, or obtain a line of credit. I know, you’re saying ‘why do I have to pay to have great credit?’; unfortunately, it is the name of the game.

    • Credit.com

      Excellent advice, Carolyn. So true.

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  • ivo ivan jelic

    i live in canada ? can-you-help,,,jelic

    • Credit.com

      Ivan – what’s your question?

  • Raquel

    I have disputed something on my credit report with clear evidence of the mishap but it remains on my credit report as disputed, should this not have been removed?? And it has been over a year already, any advice?

    • Credit.com

      Raquel — Disputing and correcting an error shouldn’t take a year — ever. Under Federal law, the credit reporting agencies have 30 day to investigate and resolve a dispute. Providing clear evidence is a very good way to go, and generally helps in cases where the data furnisher (or the entity reporting the item) validates that the error is actually accurate. Can you provide a little more detail on what you disputed and what the error was? We may be able to shed a little more light on why it wasn’t updated, etc.

      In the meantime, here are two resources that may help in resolving a dispute and how the dispute process works:
      - A Step-By-Step Guide to Disputing Credit Report Mistakes
      Credit Report Mistakes? Here’s How to Fix Them

  • Annie W

    If I have a store credit card that I had a late payment on about 4 years ago and I haven’t used it since (I have already paid off the entire balance,) should I close the account? Would it be better for my credit score to close the account, or should I keep it open?

    Also, I heard a rumor where if you pay off your account balances before it’s due, it hurts your credit. Is this true?

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  • Zach

    I have a credit limit of 500, if I’ve spent 400 of it I know it’s a high utilization ratio but if I pay it down under the 25% ratio before its due, will it show on my credit report

    • http://www.credit.com/ Credit.com Credit Experts

      It will depend on when your credit card issuer reports their update to the credit reporting agencies. To help explain, most credit card issuers report updates to the credit reporting agencies once a month, typically around the same time your monthly statement drops. To know for sure, you may wish to call your credit card company to find out when they report their update –If you pay the balance before the next statement drops, it should show the with the next update… otherwise, it’ll probably take a good 30+ days for you to see the updated balance.

      One last comment regarding your utilization, I know it’s hard with a low credit limit but ideally, you want to try and keep that utilization to even less than 25%. The lower the utilization the better for your scores which means 20% is better than 25%, 15% is better than 20%, etc.

  • http://www.credit.com/ Credit.com Credit Experts

    Using credit and paying your bills on time is the best way to improve your credit scores. Paying a credit card off each month — which can result in a zero balance — will not hurt your credit.

    For tips on how to expedite the process of raising your credit scores, see 3 Ways to Boost Your Credit Score.

  • http://www.credit.com/ Credit.com Credit Experts

    It might, for two reasons. One is that it will raise your credit utilization rate, the percentage of available credit that you are using. (If you have a credit limit of $1,000, for example, a balance of $200 would translate into a credit utilization rate of 20%). You want to keep that number below 30%; below 10% is even better. Closing two accounts will reduce the amount of available credit. The other reason is that age of accounts also affects your scores. If these are accounts you’ve had for many years, you might want to keep them open for that reason. There resources may be useful in understanding more about factors that affect your credit scores.
    The Biggest Credit Mistake People Make
    Why the Age of Your Accounts Matters

  • bsue

    I have a card that went bad in 2004 and I have not heard anything about it until recently. It is over 9 yrs since a creditor had contacted me about this account. Am I still obligated to pay the balance and how can I verify it’s the true balance.

    • http://www.Credit.com/ Gerri Detweiler

      The statute of limitations in your state has likely expired. That means they can’t do a whole lot to collect. In addition, a debt that old should not be on your credit reports either. The exception to both would be if they have obtained a court judgment against you. (Your credit report would likely list a judgment if that were the case.) Read: Does Your Old Debt Have an Expiration Date?

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