Credit score

6 ways you could be hurting your credit score without realizing it

A friend of mine recently applied for a home loan. When he first filled out the application, his credit score was nearly perfect. Due to its excellent credit rating, some of the closing costs have been reduced. Time has passed and there have been some delays in setting up the loan process. When the lender was ready to move on his loan, they ran another credit report. For some reason, his credit rating had dropped a few points. That drop ended up costing him an additional $1,500 in closing costs.

A near-perfect credit score can save you thousands of dollars over your lifetime, and a poor credit score can do the opposite. Rod Griffin, Senior Director of Public Education and Advocacy at Experian (EXPGY) says that there are many ways consumers can harm their credit without even realizing it, and some of them are very sneaky.

Missing payments: Late payments are a key factor hurting people’s scores. Paying a little late might seem harmless enough, but it has a surprisingly big impact. Even a 30 day late payment can have a substantial negative impact.

Have a high balance: Having a high balance is the second most common problem that negatively affects people’s credit scores. As a general rule, you should try to keep your credit card utilization rate below 30%. The lower your balances are compared to your credit limits, the better. If you’re in the habit of running large balances on your credit cards every month, you might be hurting your credit score without realizing it, even if you never fall behind on those accounts.

Closing credit cards at the wrong time: Closing a credit card account increases your overall credit utilization rate, which is a sign of risk. As a result, your credit ratings may drop. If you’re planning on making a major credit purchase, such as a house or car, in the next three to six months, it’s usually best to leave the account open until the purchase is complete.

Your credit usage is also called your balance-to-limit ratio. Here’s how to calculate it: add up all your credit card balances separately, then add up all your credit card limits. Then divide the total balances by the total limits. This is your balance-to-limit ratio. Generally, a lower ratio means a better credit score.

The stakes of the co-signer of a loan: When you co-sign for a loan, you are saying that if the person you are co-signing for does not pay the debt, you will. This loan will appear on both your credit reports along with payment history. If the person you’re co-signing for doesn’t repay their loan and the account is in arrears, that late payment will also hurt your credit.

Default on accounts: Types of negative account information that may appear on your credit report include foreclosure, bankruptcy, repossession, charge-offs, settled accounts, and, if charge-off, a subsequent collection account. Each of these can seriously damage your credit for years, or even up to a decade.

Apply for a lot of credit in a short time: Every time a lender asks for your credit reports for a loan decision, a serious inquiry is recorded on your credit file. These requests remain on your file for two years and may cause your score to drop slightly for a short time. Lenders look at the number of hardship applications to assess the amount of new credit you are requesting. Too many inquiries in a short time can signal that you are potentially slipping into financial trouble by suddenly taking on a lot of new debt.

Jeanette Pavini is an Emmy Award-winning journalist specializing in consumer information and protection. She is the author of “The Joy of $aving: Money Lessons I Learned From My Italian-American Father & 20 Years as a Consumer Reporter”. Jeanette is a regular contributor to TheStreet. His work includes reporting for CBS, MarketWatch, WSJ Sunday and USA Today. Jeanette has contributed to “The Today Show” and a variety of other media. You can follow her money-saving tips and ways to give back on Facebook: Jeanette Pavini: The Joy of $aving Community. Find links to his social media and his book at jeanettepavini.com.