There are several actions (or inactions) that can have a negative impact on your credit score and credit report. The good news is that the damage from most negative actions can be fixed, but the bad news is that some of them might take a long time before the results start to have a significant impact on your credit report (to learn more about what a credit score is and how to establish one, click here).
What can hurt your credit score?
- Missing/late payments
Late payments could be registered as a delinquency on your credit report.
- Maxing out credit cards
The credit bureau interprets it to mean you might be a future credit risk.
- Shopping for new credit frequently
Every time you apply for a loan, the loan officer runs your credit, and if you do this frequently, there will be several inquiries on your report, which is considered a red flag by the credit bureau and potential lenders.
Tip: If you need more than one loan, apply for them at one institution all at once so they only need to run your credit report one time.
- Taking out several loans in a short time frame
The credit bureau interprets it to mean you might be a future credit risk, because the more loans you take out, the more payments you need to make every month.
- Ratio of revolving debt to installment debt
The use of revolving debt is considered more risky by credit bureaus because it is borrowed money that you can use over and over, and it has much more potential to be maxed out or to miss payments.
Meanwhile, installment debt is a fixed rate that you pay each month, and since the item you’re paying off often acts as collateral that the institution can seize if you fail to make payments, it is less risky for them.
- Closing credit cards
Length of credit (how long you have had all open loans) accounts for about 15% of your credit score. If your credit card is your oldest open loan but you close it, your length of credit will change to whatever your oldest open loan is.
For example: If you have had a credit card for 15 years and have had a car loan for 5 years, closing the card will reduce your length of credit from 15 years to 5 years.
Tip: Even if you don’t use it, consider keeping your oldest credit card open just to ensure that your length of credit remains the same.
- Collections/profits and losses/bankruptcy/tax liens
Since these are actions (or inactions) by you, it serves as historical evidence that you might be unreliable and a high risk for paying back credit.
How can you fix it?
Make sure to make at least the minimum payment on all of your loans each month. Also, if you have revolving credit (like a credit card or a HELOC), only use about 30% or less at any given time, and try to pay it off every month if possible.
- Share-secured Signature Loan
The institution puts a hold on a certain amount of money in exchange for giving you a loan of the same amount. This held money is still yours, and you will receive it back when your loan is closed; it is simply held by the bank as collateral in case you default on your loan.
This is a good way to establish a good payment history and trust.
- Share-secured Credit Card
The institution puts a hold on a certain amount of money in exchange for giving you a credit card of the same amount. This held money is still yours, and you will receive it back when your credit card is closed (or if, after a sufficient period, you refinance it to be an unsecured credit card). The money is simply held by the bank as collateral in case you default on your credit card payment.
This is another good way to establish a good payment history and trust.
- Debt Consolidation
If you have several credit cards or loans with high interest rates, you may be able to consolidate them for a much lower rate.
For example, if you have three store credit cards with 25% interest rates, you may benefit from consolidating all of that debt under a signature loan; even if the loan has a 14% interest rate, that is a fraction of what the cards have, and then you need to make just one monthly payment.
If you find that your auto loan payment is too high for what you can afford every month, you might be able to refinance it (depending on what the vehicle’s value is and what your current loan term is). If you refinance for a longer loan term, it will lower your monthly payment so that you can now afford to make it on time. If you make it on time from then on, it will help to improve your credit score. If you leave your too-high loan payment the way it is, you might not be able to make your payments, which will in turn hurt your credit score.
If you made some mistakes in the past and your credit score is now suffering, you can always turn it around. Your credit score is constantly updating, so as long as you takes steps to make your payments every month and other improvements to your credit history, your score will be sure to follow.