Unexpected Ways You Could Be Damaging Your Credit
We all want good credit scores. It makes us feel good about ourselves and helps us get the financing we need. Scores in the 700’s make us puff out our chests and feel proud. We believe that people with good credit scores make smart financial decisions and are on the correct financial path, all things we want to be associated with.
Having a high credit score makes life a little bit easier. We can qualify for the big purchases in life; a home mortgage, car loan or credit card. Now-a-days your credit score affects more than just your ability to qualify for a loan or credit line. Your credit score goes much deeper than that. It affects things you don’t even expect like how much you pay for auto insurance, your chance at a new job, and where you live as landlords often run credit checks before approving rental applications.
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So it’s important to know all the ways in which you can hurt your credit score. This article is not about the expected though, it’s about the unexpected ways you may be lowering your credit score. The things you do every week that can put you behind the eight ball.
Transferring From Card to Card
Transferring your credit card balance from one card to the next can seem like a prudent financial move when one card offers lower interest rates than your current one. Making just one balance transfer to a new credit card can save you money, but it can also hurt your credit score.
That’s because your credit score is heavily impacted by your credit utilization ratio. This ratio is made up of your credit card balances and limits. The credit agencies like to see wide gaps between your balances and your limits. For example, credit card A has a 18% interest rate, a $2,000 limit and a $1,000 balance. Credit card B has a 24% interest rate, a $3500 limit and a $2,000 balance. Your credit utilization ratio on card A is 50% and 57% on card B. Then you transfer both balances to a third card that has a lower interest rate and a $4,000 limit. Now you have a balance of $3000 and your credit utilization ratio has jumped to 75%! The higher your credit utilization ratio, the lower your credit score will be. If you transfer a credit card balance to a card with a lower credit limit than the previous card, it makes it look like you’re closer to maxing out that second credit card. That’s why your credit utilization will go up and you will lower your credit score. It’s best to keep your credit card balances between 25-35% of your entire credit limit.
If your current interest rate is just too high to bear and you must do a balance transfer avoid opening a new credit card to do so. Every time you open a new account your credit score drops by 5-10 points. New accounts make lender’s nervous because they assume you will soon be taking on more debt. Instead transfer your balance to a card you already have. You can also raise your credit score by paying down your balance quickly, which will lower your credit utilization ratio.
Fines and Penalties
Did you know an unpaid library fine can hurt your credit score? So can an unpaid traffic ticket. Any unpaid fees, fines, or penalties you’ve received can lower your credit score, even though they seem unrelated to your credit.
Many state and local governments are having financial troubles these days. They are collecting fewer taxes and paying out more in unemployment assistance. One way they are trying to fix their balance sheets is to go after residents who owe them money in the form of parking tickets, library fines and utility bills. Increasingly these governments are turning debts over to private collection agencies that get a commission when they get you to pay. One tactic these agencies use to get you to pay is to report your unpaid debts to the credit bureaus. Once they do that your credit score is dinged and promptly lowered affecting your ability to get credit in the future.
It’s important to pay all fines and penalties on time. If you pay your fines before your debt is turned over to a collection agency you should be OK. Don’t think you can get away with not paying by moving away. Governments won’t take the time to track you down; they’ll simply turn your debt over to collection agencies who can easily find you and your credit score.
When you open a new cell phone account the provider will run a credit check on you. This makes sense because in effect they are “loaning” you minutes. And once you have a cell phone, some providers will report your monthly payments to credit reporting agencies. AT&T reports both your on-time and late payments. Other providers, like Verizon and Sprint, only report unpaid accounts that are 3-6 months delinquent.
To avoid this ask your provider its policy on reporting your payment history to credit agencies before signing up for wireless service. Payment history makes up 35% of your total credit score so paying on time can raise your score as quickly as not paying can lower it.
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Your Oldest Credit Card
In terms of credit, age is your friend. If you close the credit card you’ve had the longest you will put a dent in your credit score. The length of time you’ve had credit accounts for is 15% of your overall credit score. It also takes into account the average age of all your accounts so you don’t want to close a bunch of accounts, even if you don’t use them anymore. Closing out your old credit cards shortens your credit history. This can make you appear as a riskier investment to lenders as opposed to someone with a longer credit history.
It’s often shocking to see the weird things that ruin your credit. Though when you know what they are it’s easy to use them to your advantage.
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