On the surface, credit scores are simple: You take a specific action, and your score changes to reflect it.
However, the types of actions that cause positive changes versus negative changes aren’t always so intuitive. You might do something you assume is harmless or even beneficial to your credit, only to see your score take a hit.
But you’re in luck. We spoke with credit experts to find out which little mistakes can have a big impact on your credit.
1. Waiting Until The Due Date To Make A Payment
One of the biggest factors that affects your credit is amounts owed, also known as your credit utilization ratio. This measures how much of your available credit you’re actually using. It’s recommended that you keep your credit card balance under 30 percent of your available credit to prevent your credit score from dropping.
The problem? “Most credit card issuers report balances to the credit reporting agencies around the time the billing cycle closes, well before payments are usually made and credited,” explained Gerri Detweiler, education director at Nav, a credit monitoring service. That means if you rack up a big balance during the month, it could look like you have a high utilization ratio even if you pay the whole thing off on the due date.
Fortunately, there’s an easy way around this problem. “If you do use your credit card heavily one month, get online and pay down the balance before the close of the billing cycle so the balance that shows up on your credit report will be lower,” said Detweiler. You can call your credit card issuer to find out what date balances are reported to the credit bureaus.
2. Closing A Credit Card
If you finally paid off a credit card and aren’t interested in going into debt again, closing the account might seem like the right thing to do. And it can be ― but before you do it, make sure you don’t have balances on other cards, too.
“The reason closing a credit card account affects scores is because you lose the available credit on that account,” explained Rod Griffin, director of consumer education and awareness at Experian. However, your outstanding debt remains the same. That can cause your credit utilization ratio to jump up and your credit score to fall.
But you shouldn’t leave accounts open if you’re not using them, and they’re costing you money. “If you have an account you never use, your credit score is in great shape and you’re not planning to apply for credit, you might close that account if you’re tempted to use it to take on more debt than you should,” said Griffin. Just pay down any outstanding balances on other cards first to keep your utilization rate low.
3. Applying For Store Cards To Get A Discount On Your Purchase
Shop at just about any department store and you can probably guess what the cashier’s next question will be after “Did you find everything you were looking for?”
Sign up for the store’s credit card and you’ll instantly receive a discount on your purchase, the cashier will tell you. You plan to pay it off right away, so what’s the harm in applying?
“Sure, the discount can be enticing, but applying for a store card has potential downsides,” said Penelope Wang, money expert for Consumer Reports. Every time you apply for a credit card, there’s a “hard inquiry” on your credit. Just one inquiry has little to no impact on your credit score. But if you have several within the last couple of years, your score can take a hit.
“Moreover, signing up for new cards will also lower the average length of your credit history, which can also hurt your score,” said Wang. New credit accounts for 15 percent of your score, so opening too many new accounts within a short time frame can be a red flag that drags your credit score down.
Wang also pointed out that retail cards tend to carry high-interest rates, so if you don’t pay off the balance, keeping that card open can cost you. You don’t have to stress about opening one or two store cards with retailers you shop often, but you should avoid filling out an application every time you’re offered one just to save a few bucks.
4. Co-signing On A Loan
If you have great credit, a close family member or friend might ask you to help them out by co-signing a loan. Your strong credit history would help them qualify when they wouldn’t be able to otherwise. It can be tempting to do it, especially if a loved one is struggling. But you should definitely think twice.
“Co-signing a loan means that you are equally responsible [for the debt],” said Sukhjot Basi, CEO of Bank Yogi. “If the person you have co-signed a loan with fails to make a payment... it will reflect on your credit report, thus hurting your credit score.”
So while you might be handling your credit just fine, a slip-up on your co-signer’s behalf could send your credit on a downward spiral. Unless you know the person very well and can afford to make payment in case they fail to do so, you should probably not co-sign on any loans.
5. Paying Off A Loan
Hopefully, if you took out a loan, you did so with the intent to pay it back. And by making all your payments on time, you’ve actually done wonders for your credit score. So it would make sense that once you’ve reached the finish line and paid off your debt, your credit score would soar even higher, right? Not exactly.
As Griffin explained, “If it’s an installment loan like a car loan or mortgage, and there’s a status change from ‘active repayment’ to ‘paid,’ your score doesn’t know right away exactly what that means to your credit history.” Therefore, your credit score might temporarily dip due to that disruption.
But don’t worry: In a month or two, your score will stabilize. In fact, it should eventually go up thanks to having another account in good standing to your name.
6. Not Checking Your Report And Score
Sometimes a drop in your credit score can be due to an error on your credit report or even fraud. If you’re unaware of any problems, a small issue can turn into a big headache over time.
That’s why it’s important to regularly check your report and score for anything out of the ordinary.
There are a few places you can get this information for free. First, you can visit annualcreditreport.com to get a free copy of your credit report from all three credit bureaus once a year, according to Griffin.
If you have a credit card with a major bank, it will likely let you see your FICO credit score for free as well. You can also visit sites such as Credit Karma to see your score ― they provide your VantageScore rather than FICO, but it’s still worth checking out if you simply want to keep tabs on your overall credit health.
And don’t worry: Checking your own credit doesn’t affect your score at all.
7. Avoiding Credit Completely
The whole credit system probably feels like a game where the odds are stacked against you. And you wouldn’t necessarily be wrong. But it’s a game you have to play to win, so avoiding credit completely won’t do you any favors.
“There are several financial gurus who have been preaching lately that people should not be getting any credit cards or loans,” said Basi. Unfortunately, a large number of millennials are falling for it.
“I have come across college educated, professional individuals who have $50,000 or more in their low-interest savings accounts, but no credit history at all,” said Basi. “They do not realize that how expensive it is for them to follow this advice, and they pay a lot more [because of it].”
The truth is you have to use credit in order to build up a strong credit history. That doesn’t mean you have to go into debt ― you can use credit responsibly. But if you avoid it altogether, you’ll have a hard time accomplishing basic financial goals such as renting an apartment, opening utility accounts and borrowing money at an affordable rate if it ever turns out you need to.
Should you be worried about your credit score?
Griffin said that credit scores go up and down all the time, and small fluctuations shouldn’t be a concern. When it comes to the number of points that should be cause for alarm, there’s no right answer. “What’s significant depends on your unique credit history,” said Griffin.
He explained that someone with a very strong score ― say, 800 ― could experience a 20-point drop to 780 but still be considered a prime borrower and have no problem getting a loan. For someone with fair credit, however, that drop could mean the difference between getting approved and not.
The best thing you can do is focus on using credit responsibly by keeping your balances low and always paying on time. “Don’t let worrying about a credit score cause you to make a bad financial decision,” said Griffin.