Several factors come into play when calculating your credit score. According to FICO.com, your credit score is affected by five major elements, in this order of importance: payment history, amounts owed, length of credit history, new credit and types of credit used.
That said, here are some things you might be doing that could knock your score down a few pegs.
- Banning credit from your life. If you don’t use it, you lose it — your good score, that is. Credit score is a measure of how responsible a borrower you are. If you cut up all of your cards — literally or figuratively — lenders won’t know what to expect from you should the day come when you want to open up a line of credit. If you want to minimize the amount of credit in your life, try to use one major credit card for small purchases and pay it off in full monthly to keep your credit active.
- Closing old accounts. You might think since you’re happy with your current credit card that you might as well kick your old ones to the curb, but be careful. If you cancel an account that you’ve had open for a long time, you could be damaging the credit history portion of your credit score. Essentially, when you close an account, you erase that account from your history.
- Opening a new account. Doing this affects the “new credit” portion of your score. Every time you apply for or are awarded a new line of credit, your credit score takes a dip. If you’re planning on applying for a home mortgage or a car loan in the near future, hold off on opening a random charge account. The higher your credit score, the better interest rate you may qualify for, and that could mean thousands in savings over the life of a home loan.
- Owing too much, even if you pay on time every month. You might think that as long as you pay your bills, you’ll have great credit. While that is the most important aspect of a credit score, creditors think that if you carry high balances, you’re only one emergency or layoff away from being in financial trouble. It’s important to try to keep your debt utilization ratio low – that’s how much you owe as compared to how much available credit you have. Experts say keeping it at 30% or lower is best, so if you have a $1,000 credit limit, you shouldn’t carry more than a $300 balance.
- Paying a bill just one day late. Once your credit card company flags you for a late payment, you can expect a ding on your credit report. The damage will be greater if you go beyond 30 or 60 days without making a payment, but even one day late can be enough to hurt your score.
If you’re thinking of making any moves when it comes to your credit, do some research first to see how your plans might affect your credit score. You’ll be glad you did.