6 things that hurt your credit score and how to avoid them

Using a credit card while online shopping.

While you might disagree with its assessment - or balk at the idea of being reduced to a number - your credit score is one of the main things banks and lenders rely on when determining whether or not to give you a loan.

Thankfully, you do have some degree of control over it. Nowadays, it’s standard for financial institutions to look at the whole picture when assessing your finances. The introduction of Comprehensive Credit Reporting means that if you’ve managed to stay on top of your spending and repayments, this will be reflected in your credit score.

But what about the factors that might jeopardise it? While everyone can guess at the main ones - bill payment history, debts and defaults - there’s plenty more that goes into it. Here are some things that everyone should be aware of.

  • Applying for lots of credit in a short amount of time
  • Not having any active lines of credit
  • Maxing out your credit card
  • Failing to correct errors
  • Having a partner default
  • Closing a credit card with an excellent repayment history

1. Applying for lots of credit in a short amount of time

That scattershot approach may have worked well for you on Tinder, but it’ll only hurt you when it comes to applying for credit cards.

This is because each new application is recorded on your credit report. Make too many in a short amount of time and it signals that you’re in a precarious position financially or desperate for credit, which could damage your credit score. If banks had any reservations about doing business with you before, they’ll definitely want to distance themselves from you now.

Solution: Make sure you compare your options before applying, whether you're after a credit card or a personal loan, and only apply for the one you really want and will be eligible for.

2. Not having any active lines of credit

This one is a bit frustrating but it makes sense. If you don’t have any active lines of credit, your credit history will read like a blank page and your credit score is likely to be low. In the eyes of a credit reporting body you’d register as little more than a vague blur.

This is the downside to using debit cards and cash. They don’t actually have any bearing on your credit score, and so can’t be leveraged to win favour with banks and lenders. What banks are looking for is evidence that you’re a responsible borrower, and if you’ve never used a credit card you’ll find it’s very difficult to make that case.

Solution: One obvious solution is to sign up for a credit card, just make sure you manage it properly. Start with a low rate credit card with a low limit and set up automatic payments so you don’t fall behind.

3. Maxing out your credit card

One of the things that goes into calculating your credit score is your debt-to-credit ratio. This is how much credit you’ve used as a percentage of your total credit limit. For example, if your credit limit is $5,000 and you’ve used $1,000, your debt-to-credit ratio will be 20%.

A low debt-to-credit ratio paints a positive picture. It tells lenders you’re capable of being responsible with your credit card. A high debt-to-credit ratio (above 30%) is likely to sound alarms.

Solution: You’ll want to work out 30% of your credit card limit and avoid going over it. It helps to keep track of your spending so think about setting up a budget.

4. Failing to correct errors

You need to be proactive when it comes to your credit score. If it’s been brought down by inaccurate information or errors on the part of creditors, it falls on you to set things straight.

This is why it’s a good idea to check your credit score regularly, especially before applying for a loan. If it turns out that there are inaccuracies, such as bills which were incorrectly listed as unpaid or information which doesn’t pertain to you at all, you’ll need to call up your credit providers and make sure they correct the listings.

Solution: You’re entitled to a free copy of your credit score and report each year, so it’s a good idea to review them annually.

5. Having a partner default

This one concerns couples with joint funds or mortgage payments: shared finances mean shared debts. If you and your significant other have bills and credit cards in both your names and one person winds up defaulting on a debt, both individuals’ credit scores will be affected.

As our report on financial dealbreakers showed, money matters like this can put serious strain on a relationship, so make sure you don’t let things get out of hand.

Solution: If your significant other can’t be relied upon to make payments on time and pestering them won’t work, think about going back to separate accounts.

6. Closing a credit card with an excellent repayment history

If you’ve got an inactive credit card account that you’re thinking of closing, you might want to reconsider. As long as you used it responsibly and made all your repayments on time, it’s still vouching for your creditworthiness, regardless of whether or not you’re currently using it.

Good accounts like this help keep your credit profile in good standing, so closing them is like benching your star player.

Keep in mind though that having multiple sources of credit or a high overall credit limit can be a red flag for lenders, because it increases your capacity for debt. So leaving an inactive credit card account open can sometimes make it trickier to apply for a new loan or credit card.

Solution: Unless you’re paying fees on it, it’s a good idea to leave the account open. But if at some point you decide to apply for a new card or personal loan, that might be the time to reassess whether or not to close the account.

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