4 Mistakes That Can Drag Down Your Credit Score

Credit scoring has become big business. There are a number of scoring algorithms that can impact the way financial service providers see you. Your credit score influences decisions about whether or not you should get a loan, as well as whether or not you should have favorable terms when you are approved for a loan.

Not only that, but there are instances when your credit score can impact your insurance premiums and other aspects of your financial life. As a result, it’s important for you to do what you can to keep your score in good shape. Unfortunately, we’re all prone to blunder. Here are some of the mistakes that can drag down your credit score:

1. Missing Non-Credit Bill Payments

Most of us know that missing credit payments, like those for credit cards and mortgages, will result in lower credit scores. However, some consumers don’t realize that even their non-credit accounts can have an impact. If you miss utility payments, or you don’t pay your medical bills, those accounts can be turned over to collections and reported to credit bureaus.

2. Maxing Out Your Credit Cards

It seems as though it wouldn’t matter how much you have on your credit cards, as long as you pay at least the minimum on time, and you don’t go over your credit limit. However, this isn’t the case.

When you carry high balances, you are causing severe damage to your credit score. Many credit scoring models use your credit utilization – the percentage of available credit you are using – as one of the top three factors that influence your score.

You’re better off keeping your credit card balances to below 50 percent of your available credit, and it’s even better if you can keep it to under 30 percent of your available credit. Best of all, though, is if you pay off your card each month to avoid falling into the debt trap.

3. Canceling Credit Cards

Some consumers get excited about canceling credit cards, especially as they pay down debt. Unfortunately, this can affect your credit score in a couple of ways.

First, you are reducing your available credit. If you still have balances on other credit cards, your total credit utilization has just been impacted.

Second, you are reducing the length of your credit history. Many credit scoring models look at how old your accounts are. Canceling an account, especially one you’ve had for awhile, can lower your credit score.

4. Assuming All Loans are Created Equal

A credit card is a credit card, right? Not exactly.

Most credit scoring models take into account the type of credit account you have. A credit card issued by a retailer, and not usable outside that retailer, is considered less positive than a credit card issued by a major bank. Likewise, a payday loan can actually negatively impact your score in some cases, while a car loan (if you make all your payments on time and in full) can be good for your credit score.

Pay attention to the type of account you are getting, and where the debt comes from. You’ll be able to better protect your credit score.

What are some other mistakes that can drag down your credit score? Leave a comment!

Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

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