You might be surprised to know what can hurt your credit scores — including paying off certain loans on time and in full. Most consumers have three credit scores, issued by TransUnion, Equifax and Experian. These credit reporting agencies use more than just late payments to ding you, so it’s a good idea to know exactly what can lower your scores. Downloading a free copy of your credit reports is a good place to start learning about your credit history and what you can do to keep your credit in good standing.
Items on your credit report that show a poor use of credit are called derogatory items. These include late or missed payments, debt consolidation, collections, liens, garnishments and bankruptcies. One of the easiest of these to control is late or missed payments, which can occur when you use the mail to pay bills. Activate online services that come with most credit accounts to keep track of your bills and payments. Use an auto-pay feature if it’s offered to ensure you never miss a payment. If you use the mail to make payments, pay early and check your online account to make sure your payment arrived on time. If you find any inaccurate derogatory items on your credit reports, contact the reporting agency immediately to get them removed.
Two Few Installment Accounts
Installments accounts are those in which you make regular, fixed payments, such as a car or student loan or furniture bought on time from a retailer. Installment accounts show that lenders other than credit card companies trust you to make purchases and pay them off. You might think that paying off your car, student loan or new bedroom set might help your credit score, but if you have no installment accounts, that will lower your score. Buying items on time costs you interest, but can raise your score, if that’s important.
Debt to Credit Ratio
Closing a credit card you’re not using is another example of a seemingly positive act that can ding your score. The lower your debt-to-credit ratio, the higher your score. If you have $10,000 worth of credit cards and $2,500 in charges, your debt-to-credit ratio is 25 percent. If you cancel a card with a $5,000 line of credit, your debt-to-credit ratio soars to 50 percent.
Recently Opened Accounts
If you want to close a credit card, close newer cards for two reasons. Recently opened accounts negatively affect your score because you don’t have as much history with them, and older accounts add more points to your score. When you open a new account, creditors usually pull one of your credit reports, lowering your score by a few points. These inquiries, combined with a new account and the closing of an old account, can take more than a few points off your score. If you open a new credit card and transfer a balance from an old card, don’t close the old card until you see the effect the newly opened card has on your score.
Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.