What Can Hurt Your Credit Score: 7 Common Mistakes to Avoid

what can hurt your credit score

Not knowing what can hurt your credit score can be detrimental to your overall financial health in the long run. If you have big dreams and want them to see the light of day, making the right credit decisions could help you move closer to your aspirations in life.

Credit card mismanagement is closely related to a low credit score, which is a growing problem for many American adults. According to a Yahoo news report, over 108 million adults have zero or low credit scores, making it harder to take out a loan and finance their dreams.

In this article, we’ll help you recognize the obvious and the not-so-obvious ways you lower your credit score. Our goal is to help you make a more conscious decision regarding your credit card usage and improve your credit health in the process.


Understanding the FICO Scoring System

Before we start, you need to understand how the current credit scoring system works. The modern scoring system we use today employs the FICO system, also called the Fair Isaac Corporation System.

The FICO system measures an individual’s creditworthiness from five primary factors, which are:

  • Payment history
  • Debt owed
  • Length of credit history
  • Credit mix
  • New or recently opened accounts

Of all five factors, payment history is critical to your credit score. This is why many individuals instinctively look at their payment history if they receive a low credit report.

The FICO credit scoring system ranges from 300 to 850. Anything below 580 is a bad score, and any number above 669 is good.


The Dangers of a Low Credit Score

A significantly low credit score holds potential dangers, such as not being able to receive a loan or even getting an apartment. This is why it’s important to do your best to keep it above the 669 mark if you want access to better credit options in the future.

Listed below are some of the reasons why you should maintain or aim for a good credit score:


Lenders See You as a Risk

The most well-known consequence of having a bad credit score is that lenders are repelled to lend you a loan. Many adults rely on loans to finance their dream house or afford the car of their dreams.

Most banks that offer lending services have strict and rigid borrowing criteria. Qualifying with a mediocre credit score is already a challenge; having a low credit score is a surefire way to get rejected.

Individuals with poor credit scores often seek financing help from predatory lenders, who come with high-interest rates. Having a weak credit score puts you in a desperate position where you’re compelled to accept extortionate rates like these.


It Would Cost More To Pay Your Loans

If you’re fortunate enough to get accepted with a low credit score, be prepared to pay much more than those with higher scores. As a measure of protection, lenders also impose higher interest rates on individuals with low credit scores.

In the example provided by myFICO, individuals with an excellent credit score of 760 and above have an annual percentage rate (APR) of 6.443%. In contrast, a poor credit score of 639 and below equates to over 8.032% APR.

The 1.6% difference might seem minuscule at face value, but it’s greater than you think. On average, it could mean a $300 to $500 extra payment per month.


Additional Charges for Utilities

In some cases, utility companies may impose additional security fees on individuals with low credit scores. Like the concept above, companies often charge this to ensure they receive payment from you.

In some states, the government enforces protection to prevent companies from depriving consumers of access to power and water. In exchange, they may demand a deposit fee to continue providing essentials to individuals with low credit scores.


Higher Insurance Premiums

In several states, insurance companies are allowed to upcharge premiums for individuals with bad credit. Companies do this if they suspect you have risky financial habits that could keep you from paying premiums in the future.

Having a bad credit score doesn’t necessarily translate to a higher insurance premium. However, there’s a high likelihood that you won’t get the best deal with a poor credit score.

Some insurance companies might accommodate individuals with a bad credit score, but not always. Remember that your payment history plays a critical role in determining your regular premium.


Finding an Apartment Is Harder

Another practical limitation of a bad credit score is being able to lease an apartment. In some cases, rental companies might hire a third-party credit agency to verify the credit score of their potential tenants.

Landlords often look for tenants with a 620 credit score; a lower score may push them to deny you the lease. If you have a poor credit score, landlords may require a co-signer to guarantee the rent payments.


Potentially Miss Out on Opportunities

A credit check is often part of routine background checks. Some employers use this to determine whether you’re a reliable team member.

Having a poor credit score doesn’t necessarily mean they will deny your application. A bad credit score is only detrimental if you’re gravely in debt or have a history of payment fraud.

Some industries emphasize an individual’s credit score, such as the financial services industry. Despite having the right qualifications for the job, a weak credit score can hurt your chances of landing one.


7 Factors That Hurt Your Credit Score

Now that you know why you shouldn’t let your credit score drop below the safety limit, here are some major factors that could hurt your credit score.


1. Late Credit Card Payments

This is one of the most frequent causes of a low credit score. Late credit card payments can reflect poorly on your financial health, which could cost you points in the long run.

In the FICO scoring system, payment history accounts for 35% of your score — the highest portion. Because of this significance, even one late payment could have a drastic impact on your credit score.


2. High Debt-to-Credit Utilization Ratio

The second most significant factor the FICO system uses is your credit utilization, which amounts to 30%. Credit utilization refers to the amount of debt you owe in contrast to your available credit.

A high debt-to-credit utilization rate means you use more credit than you can afford. Lenders usually look for a lower (preferably less than 30%) debt-to-credit utilization ratio.

A lower debt-to-credit utilization rate can demonstrate a healthier financial record and lead to higher points in the FICO system.


3. Length of Credit History

Next is the length of credit history. This element equates to 15% of your overall credit score.

The longer your average length of credit history, the higher points you’ll receive in this category. At the same time, if this is your first time using credit, you typically won’t receive an impressive credit score.


4. Hard Inquiries

Whenever you apply for a credit or loan, the lender or the bank will perform a hard inquiry to evaluate your creditworthiness. 

There are many situations that involve hard inquiries. These range from applying for a new credit line to obtaining a mortgage.

Hard inquiries often deduct around five points from your credit score and remain on your report for two years. Because of this, you must consider every hard inquiry before applying for any credit.


5. Closing a Credit Card Account

Closing a credit card account impacts several FICO factors causing a drastic drop in your credit score. Most of these drops come from decreasing the total amount of available credit, which affects both the length of your credit history and your debt-to-credit utilization ratio.

Moreover, it also affects your credit mix, as closing a credit card account decreases the number of revolving accounts in your portfolio. It might be tempting to close a fully-paid account, but you must remember that this could have drastic repercussions on your credit score.


6. Declaring Bankruptcy

Declaring bankruptcy or defaulting on your accounts deeply impacts your credit score. Bankruptcy stays on your report for up to ten years and could easily deduct 100 to 200 points from your credit score.

The amount of points deducted from your score varies according to your credit score before you declare bankruptcy. Because of its lengthy record in your report, it’s best to consider alternatives.

Before you declare bankruptcy, you must speak with your creditors or a bankruptcy professional to evaluate your options. In some cases, they can arrange a repayment term to help you catch up with your debts affordably.


7. Not Using Your Credit Card

Maximizing your credit card increases your debt-to-credit ratio, which affects your credit score. At the same time, not using your credit card at all will also negatively impact your credit score.

Inactivity on your account shows lenders that you’re not active with credit, which could put your credit score at risk. To maintain an active record, you must use your card periodically and pay off the full balance on time.

The key here is to know how and when to use your credit card. Healthy credit card habits are essential for boosting and keeping your credit score steady.


How to Improve or Maintain a Good Credit Score

Reforming bad credit habits is easier said than done, and it’s more than just reversing the damage you’ve done. 

here are some practical tips and tricks to help you improve or maintain a good credit score, and get back on your feet:

  • Review your credit reports: Check your credit report annually by visiting www.annualcreditreport.com. This ensures that all information recorded on your credit report is accurate and up-to-date.
  • Catch up on your loans and debts: Always pay your loans and debts on time, even if you can’t afford to make the whole payment. This prevents late payments on your credit report, negatively affecting your credit score.
  • Use your credit card moderately: It’s best to use it for essential purchases, such as groceries or utilities. This will help you prevent overspending and maintain low credit usage.
  • Refrain from opening or closing an account: Closing or opening an account can significantly affect your credit score. Make sure to weigh the pros and cons before you make a decision.
  • Consider debt consolidation: If you’re in an unfavorable financial state, consider applying for debt consolidation. You may benefit from combining multiple debts into one loan with a lower interest rate.
  • Get tailored financial solutions: Every financial situation is unique, and some methods may not work for your circumstance. Don’t be afraid to consult with financial advisors or counselors, so they can offer customized financial solutions to improve your credit score.


Stay On Top of Your Credit Record

Caring for your credit score is a long-term commitment. You must be vigilant to ensure your credit record is in top shape. 

By understanding the habits or actions that could lower your credit score, you can take the necessary steps to protect it. With a little financial discipline and an eye for details, you can quickly repair and improve your credit score.

If you have a low credit score, or it’s preventing you from achieving your financial goals, don’t hesitate to ask for help. You can find assistance from professional advisors who can provide tailored solutions to get you back on track.

At 121 Financial Credit Union, we help our members restructure their financial health and improve their credit scores. Our team of talented financial advisors is here to help you straighten out your finances and get back on track.

Contact us to learn more about our products and services, or join our community to find the support you need for your financial journey.

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