We all know that paying our bills late can damage our credit score. And most of us know that having too much debt is a challenge, too. However, there are some seemingly harmless things can harm your credit as well.
Here are some surprising things that damage your credit:
1. Getting the wrong type of credit. Obtaining your financing from the source of your purchase is generally frowned upon. Furniture stores, car dealerships, and more are common sources of this ‘second class’ credit. They’re viewed as credit for those that don’t have options.
- It doesn’t damage your credit score for this reason, but those reviewing your credit history are likely to hold it against you.
- It does damage your credit score for this reason: These types of loans have a credit limit that matches the amount of your purchase. This means your credit is maxed out on that account. We’ll cover why that’s an issue next.
2. Your utilization ratio is too high. A significant portion of your credit score is determined by how much of your available credit you’re using. For example, if your credit card has a credit limit of $2,000 and your balance is $500, then you’re utilizing 25% of your credit on that account.
- The magic number seems to be 30%. Avoid using more than 30% of your available credit and you’ll be in great shape. That’s why the 100% utilization in the previous tip is detrimental.
- Your credit utilization is also why closing accounts can damage your credit score. The less credit you have available to you, the higher your utilization ratio will be whenever you do use your credit. Consider that fact when you think about closing accounts. Keeping them open raises the amount of your available credit.
3. Hard inquiries. In the world of credit, there are hard inquiries and soft inquiries. Hard inquiries lower your score for a time, while soft inquiries don’t affect it at all.
- A hard inquiry is when a potential creditor looks at your credit report to determine if it will extend credit to you. It shows that you’re looking for more credit. Opening a new checking account and renting a car with a debit card can also result in hard credit checks.
- A soft inquiry occurs when you look at your credit report. No harm, no foul. It’s also a soft inquiry when a current creditor takes a peak at your report to ensure that your credit is still in good shape since the last time they looked.
4. Not using any credit. Perhaps you feel that you’re being financially intelligent if you swear off credit altogether. However, even if you keep your credit cards, if you never use them at all, you’re hurting your credit score. You need to have some sort of payment history.
- Use your credit cards once in a while. Buy a tank of gas or dinner and then pay it off at the end of the month.
Your credit is worth keeping in mind. So many things are more expensive when your credit is poor. In fact, many things are entirely out of reach if you have a low credit score. Remember the surprising things in this article that can damage your credit and make an effort to avoid doing any of them. Your financial future depends on it!