By Jonathan Roisman, NextAdvisor.com
Deciphering your credit score can be difficult, especially if you don't know all the ways you can be hurting it. Your credit is not only attached to your credit card use, but with many everyday financial activities. Here are five things that can hurt your credit, and ways to prevent them from happening to you.
1. Closing a Credit Card Account
The act of closing a credit card account doesn't hurt your score in and of itself. What it can do, however, is lower your credit utilization ratio, which determines about 30 percent of your FICO score, according to FICO. Let's say, for instance, you have two credit cards, both of which have a $5,000 credit limit, giving you $10,000 of overall credit. If you owe $2,500, your credit utilization ratio -- which determines how much credit you are currently using -- would be 25 percent, a healthy figure. However, if you closed one of your accounts, your credit utilization would shoot up to 50 percent, negatively affecting your credit score.
If you do decide to close an account, make sure your utilization ratio will stay below 30 percent once the account is closed.
2. Applying For New Credit
When you apply for a new line of credit, whether it's for a credit card or an auto loan, the credit issuer will run a hard inquiry on your credit report. Having too many hard inquiries on your credit report at one time can lead to a decline in your score, and can also severely affect it if you apply for multiple lines of credit in a short time frame. It's best to only apply for credit when you need it.
Also, only apply for cards that you know you can qualify for. If you get declined for five cards before getting approved, that's six hard inquiries on your credit report, which will drag down your score. Check out this list of the best credit cards for every credit score to get a better idea of which credit cards are best for you.
3. Renting a Car With a Debit Card
This is all assuming that the car rental service allows you to rent with a debit card. Some don't. At first glance this might seem odd since you're not paying with credit. However, some agencies will check your credit report if you decide to pay by debit card. The rental agency might see it as a red flag that you aren't using a credit card, so they're going to check and see if you can be trusted. It'll count as a hard inquiry and could cost a few points on your score.
4. Financing a Major Purchase
If a furniture or electronics store offers to let you finance a major purchase, like a couch or a flat-screen TV, think twice about it. Some store financing can be considered a "last-resort loan," which can make you look like a credit risk. Any financing will also result in a hard inquiry on your credit report.
If you want to make a large purchase but don't want to pay for it all at once, consider putting it on a new credit card instead of getting store financing. Many credit cards now offer a 0% intro APR for up to 18 months, which means you won't have to pay interest on the purchase for a year and a half. It will also raise your credit utilization ratio, since you are taking on more credit. These cards are now offering the 0% intro APR for 18 months deal.
5. Not Paying a Parking Ticket
You might think you pulled a fast one on the local municipality by not paying a parking ticket, but they might have the last laugh. Some cities, including New York and Chicago, send your unpaid tickets to collections agencies. Your credit score can take a severe beating if you have an account in collections.
So, while you might think you saved $65 on a parking ticket, you could be paying hundreds of dollars more on a new loan. That's because you might not get favorable terms on said loan because of the decrease in your credit score for not paying that parking ticket.
This goes the same for utility bills, back rent and other expenses that you forgot to pay. Make sure that all of your accounts are paid up so that no one can send your accounts to a collection agency.