Contributing Writer at Tally
August 12, 2019
If you care about the health of your finances, you almost certainly care about your credit score. You know you want it to be as high as possible, but do you know which things can hurt your credit score?
Credit scores can be complicated formulas. And those formulas are different, depending on if your credit score comes from FICO or VantageScore. Knowing what’s hurting your score can help you avoid the things that are holding you back — and it can even help you attain that high credit score you desire.
Keep in mind: FICO provides an exact breakdown of how it calculates your credit score, while VantageScore is less detailed about its calculation. The numbers provided below are based on FICO’s credit score calculation.
If you want a high credit score, you need to be prompt with your payments. Payment history accounts for 35% of your credit score. This is the single most important factor when calculating your score.
As long as you pay your bills on time, your payment history won’t hurt you. But if you miss even one payment, it can cause your credit score to drop significantly drop. And if you don’t pay a bill at all, you could end up having an account charged-off (more about that below).
The credit utilization rule that goes into your credit score is sometimes confusing, but FICO and VantageScore both say your credit utilization rate should be 30% or less. That’s important to remember because credit utilization accounts for 30% of your credit score.
You should try to minimize the balances on your credit lines as much as possible. You can also keep your credit utilization rate down by increasing your credit limit, if you can. The higher your utilization rate, the more likely your credit score takes a hit.
Whenever you apply for a new line of credit or a loan, creditors may look at your credit reports and credit scores. This is what’s known as a credit inquiry.
Credit inquiries account for 10% of your credit score and can stay on your credit reports for up to two years. Every time there’s a hard inquiry on your credit report — as opposed to soft inquiry — your credit score takes a hit. And that hit to your credit score is tied to the length of your credit history, meaning someone with a shorter credit history will feel the effects of a credit inquiry more than someone with a longer history.
If you max out a credit card, you’ve exceeded your credit limit. That means your credit utilization is greater than 100%, which is not good. This is the most damaging thing you can do to hurt your credit score, so avoid it at all costs.
The length of your credit history is an important factor in your credit score. Length of credit history accounts for 15% of your credit score. Here’s what’s included in your credit history:
Your longest-held account
Your most-recent account
How long you’ve maintained accounts (on average)
Recent utilization of your accounts
Closing an old credit card can make your credit history seem shorter than it really is. If you have an old card that you’re not using anymore, and you don’t have to pay an annual fee, there’s no downside to keeping the card open.
If you close a credit card that still has a balance, the balance will remain while your credit limit plummets to zero. Essentially, it will look like you’ve maxed out the card — and your credit score will take a hit. Make sure to pay off your balance before closing any cards.
A charge-off is similar to defaulting on a loan. When you open a line of credit and don’t pay off your debt, a creditor can determine that you’re unable to pay and charge-off the account.
In this case, the creditor believes you will not be able to repay what you borrowed. Charge-offs typically happen after months of non-payment and can seriously hurt your credit score.
Before your account is charged-off, a creditor may decide to send it to collections. This is where an outside debt collector tries to collect the money you owe on behalf of the creditor. Basically, it means the creditor has given up on retrieving the money itself. This, too, can seriously hurt your credit score.
Having a mix of credit (between revolving debt — like a credit card — and a loan) helps your score. Having a diverse profile accounts for 10% of your credit score. Conversely, only having one type of credit can hurt your score. Having a mix of credit is especially important if you have a short credit history.
A foreclosure is a very tough situation to deal with. It means you haven’t been able to fulfill the terms of a mortgage and will lose what you took out a loan for in the first place.
Foreclosure also creates a public record that will hurt your credit score, similar to filing for bankruptcy. This will have a major effect on your credit score.
Filing for bankruptcy should be viewed as a last resort because it will destroy your credit score. Beyond how complicated and painful it can be to go through the proceedings, a bankruptcy also remains on your credit report for seven years. This will still significantly lower your credit score and make it very difficult to secure a loan or line of credit in the future.
Each of these 10 things can hurt your credit score. But not all of them carry equal weight. If you’re wondering where to start or how to improve your credit score the most, focus on how much each aspect accounts for your FICO score:
Payment history — 35% of your credit score.
Credit utilization — 30% of your credit score.
Length of credit history — 15% of your credit score.
Credit inquiries — 10% of your score.
Having a diverse profile — 10% of your credit score.
Creditors may also look at additional factors — salary, occupation, employment history — but these are not included in your credit scores from FICO or VantageScore.
Remember: Your credit score can fluctuate. If it’s not as high as you like, you can actively work to build your credit and improve your credit score over time.