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Banks, insurance providers, and other lenders look at your credit score when you apply for their products. Whether you’re getting a loan, a credit card, or insurance, financial institutions will always look at your credit rating. Even landlords and employers look at your credit history to gauge how you handle personal finances since they see this as a reflection of how organized and disciplined you are as a person.

You certainly understand the importance of your credit score, but how can you protect it from taking a hit? Here are the things that you must watch out for to avoid getting a bad credit score:

1. Paying past the due date

The most damaging move you can do that will give a bad credit score is to miss out on credit card or loan payments. Payment history is the biggest factor that determines your credit score, so better take good care of it by avoiding late payments.

You can still pay your dues past the deadline, but this can be costly. Creditors usually post an overdue fee on balances that remain unpaid past the due date. But if you’ve never had a history of late payments, you may be able to convince your creditor to remove the overdue fees.

Lucky for you, the federal law doesn’t allow late payments to be reported to the credit bureaus unless they’re at least 30 days past the due date. This means you still have a chance to avoid getting a bad credit score if you settle late payments within this grace period.

If you still fail to pay within the grace period, you’re sure to receive a hit to your credit score. Also, late payments can remain on your credit history for up to 7 years, so this will affect your future financial applications.

Fig. 1. Average credit card debt per person
(Source: Creditcards.com)

You may think that partial payments will appease your creditors and persuade them from reporting a late payment. This is nothing but a myth, so it’s better find a way to fully repay what you owe as quick as possible.

One way to avoid late payments is to organize due dates. Creditors usually allow you to select the monthly due date when applying for credit. You can schedule this to go with the deadline for other bills or have it on the same day as your payday. Setting up alerts to remind you of the upcoming due date will also help.

The best method to avoid late payments is to set automatic debit using your bank account. This works well for recurring expenses with fixed amounts like phone bills or installment purchases.

Late payments apply not only on credit cards but also on bills such as rent, utilities, and phone service. Loans are an even bigger problem if late repayments are made. Be sure to check these expenses since they also affect your credit rating.

2. Applying for loans or more credit

There are basically two types of credit inquiries that can affect your score: a hard inquiry and a soft inquiry.

A soft inquiry is harmless and won’t affect your credit rating. Aside from you, employers, creditors, and landlords may be allowed to do a soft inquiry to check your score for business purposes.

On the other hand, every time you apply for a loan or open a new credit account, a hard credit inquiry is made against your record. Unlike soft inquiries, your approval is required before a hard inquiry is made.

A hard inquiry affects your credit score and is recorded on your credit report. You’ll probably see 5 to 10 points deducted from your FICO score and around 10 to 20 points from VantageScore whenever a hard inquiry is made.

You may think that it’s impossible to look around for the best interest rate when applying for credit since there are point deductions to watch out for every time you make an inquiry. The good news is that credit bureaus have structured inquiries in a way that lets you do several hard inquiries within a certain period without suffering massive deductions.

So long as the type of inquiry you’re making is a ‘rate-shopping’ inquiry like for a mortgage, auto loan, or student loan, then multiple hard inquiries made within 45 days are counted as a single inquiry. This means you won’t see a 100-point deduction to your credit score when shopping around for the best home or auto loan products within the given period. But be careful! Multiple hard inquiries for products like credit cards are not subject to this inquiry bundling.

Avoid making too many hard inquiries on your account, especially if the reason for doing so isn’t that necessary or urgent. Strategize your credit applications to maximize the grace period and reduce any impact on your credit record.

Attempting to open several credit card accounts in one go is also not recommended. This will look like you’re desperate to obtain credit, making you a high-risk client that might be unable to repay the borrowed money.

3. Closing a credit card account

You may think of closing a credit card you rarely use. But even though it has a clear balance, closing the account can negatively impact your credit score.

Canceling a credit card account typically increases your credit utilization ratio. This ratio pertains to the total amount you use over the total credit limit of all your cards. If you had no balance on the credit card you wanted to close, then you’ve effectively removed that entire credit card’s limit from your credit utilization ratio. This will end up increasing the ratio, and that’s not good.

Ideally, you should use only around 30% of the total limit; the lower the utilization ratio, the better. Anything higher will negatively influence the calculation of your credit score in a drastic way.

Scoring algorithms put a lot of weight in the utilization ratio because it represents your discipline in handling personal finances. Maxing out your credit limit is associated with overspending and credit bureaus will see that you have a high risk of getting into more debt.

Fig. 2. FICO credit score breakdown
(Source: myFICO)

Another undesirable effect of closing an account is its impact on the length of your credit history. Credit age is one of the factors used to compute your score.

Lenders see it as a good sign if you’re able to keep your credit card open and unblemished for years. It tells them that you’re excellent at handling finances and you’ll likely keep doing so in the future.

Scoring algorithms typically average the age of your credit accounts. So, canceling an old and well-maintained account will usually work against your favor.

But you can still consider closing an account, especially if the annual fees for keeping it open outweigh the advantages it gives to your credit record. You can try negotiating the fees first with your creditor to see if they can lower it as an alternative to closing the account. They may give in, especially if you’ve been their client for a long time.

4. Cosigning loans

Using your high credit score to help a friend or family cosign a loan can result in a big mistake. Being a cosigner means you’ll shoulder the responsibility of repaying the debt in case the primary debtor fails to do so.

Cosigning a credit application will reflect on your credit report. Your score will be severely affected if the primary borrower defaults on the loan and you are also unable to cover the costs. Or, if the primary borrower fails to make a payment on time and you aren’t notified in time to cover the payment, that late payment will reflect on your credit report. In essence, the primary borrower’s credit history on this account is tied to you.

Before you volunteer as a cosigner, make sure your assets and finances can cover the loan payments without affecting your cash flow. There’s no upside in being a cosigner, so you better think twice before doing this for someone. In addition, the reason the person you’re cosigning for needs you is typically because their credit history isn’t all that great in the first place. They may continue their history of poor credit management on the cosigned loan which will ultimately drag down your score.

But in case you really want or need to become a cosigner on a loan, ask the lender about your rights and the responsibilities you have to shoulder. Inquire about the notification process in case the primary borrower faces repayment issues. Ultimately, request access to the loan account from the primary borrower.

5. Ignoring your credit report

Finding errors in credit reports is quite common. According to the Federal Trade Commission (FTC), one in five Americans spot errors in their reports.

Although the errors aren’t your fault, you have to raise the issue to the credit bureau to recover your credit score. The catch is you’ll need to have the knowledge of how to properly validate your claims and take the time to fight with the bureaus.

This process is such a hassle that many just let the issue slide. The score deductions may not be that big either, so people just tend to let the issue go. However, if the errors are significant enough to drag down your score, you may want to list them down and start collecting evidence to remove them from your record.

You’re entitled to receive a free credit report annually from any of the credit bureaus. However, you should also have some kind of credit monitoring service so you can closely watch what goes into your credit history. This will help you immediately spot errors and resolve them before they damage your score further.

Instead of resolving report errors yourself, it’s better to get the service of professionals like Repair Credit 101. We have proven strategies for repairing credit scores and trade secrets in dealing with credit bureaus and creditors. There are many benefits of working with a reputable credit repair agency like ours. We’re so confident in our service that we offer a money back guarantee if you don’t see any improvements in your score within 90 days.

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