Most people know the conventional wisdom for keepingand maintaining your credit score at the maximum level: pay your bills on time and don’t max out yourcredit cards.
However, there are asurprising number of things that can hurt your credit score and can make creditrepair much more difficult. Here are thetop 5:
1. Waiting until the due date until you pay yourcredit cards.
Your creditutilization, or the ratio of your used credit divided by your total creditline, should be kept at a maximum of 30%. What most people don’t realize is that even if you pay your balances offin full each month, you could see high credit utilizations on your creditcards. Why? Because the credit card cycle often endsbefore the payment is due and when the credit card cycle ends, the creditorspost the balance at that point. If youowe a lot on your credit cardsat the end of the cycle, this high balance goes on your credit report, even ifyou pay it off in full on the due date. Your credit utilization is 30% of your credit score and having highratios can cost you many points.
The moral of the story: make your payment before the credit card cycle ends, especially if youhave big balances. Not sure when itends? Call your creditor to find out –and you may have to do this every month, as payment cycles are typically 20days – not an easy period to keep track of.
2. Closing a Credit Card
Sure, it seems like the responsible thing to do is to avoidtemptation and close out cards or lines of credit that you are not using,especially when you are deep in credit repair. However, credit utilization can rear its ugly head again in this scenarioas in the last one we talked about. Let’s say you are carrying a total credit card balance of $2500 across 3credit cards. Your total credit line forthese cards is $10,000. You’re sittingat 25% credit utilization rate. You thendecide to close one of the cards that has a $2500 credit line. This brings your credit utilization rate to33%, which is over the recommended 30% maximum, and your score takes ahit.
The other way closing an account could hurt you is byaffecting the age of your accounts. While closing a credit account does not remove an account from yourcredit report, having active older accounts factor 15% into your creditscore.
3. Applying for New Credit
Every time you apply for credit, a “hard”inquiry goes on your credit report. A hard inquiry differs from a softinquiry in that a soft inquiry happens when you or an existing creditorrequests to see your credit report and it does not affect your credit score. Ahard inquiry impacts your credit score negatively, usually by 2-5 points. While just one is not going to hurt you much,applying for multiple lines of credit within a two year period (the length aninquiry stays on your credit report) will hurt your score. In addition, it will lower your total averageage of accounts (as we saw above, it was 15% of your score) and decrease yourscore in this way as well.
4. Paying for a Rental Car with aDebit Card
Many rental car companies require you to pay for a rentalcar with a credit card (so the rental is covered by the credit card companyinsurance plan, mostly standard for credit cards). They may also be suspiciousthat you are paying for the account with a debit card, as your credit may bepoor and if you do have damages, may be more difficult to sue if you have anaccident. For those that allow you topay with a debit card, there is a clause in their rental agreements that allowsthem to pull your credit if you do pay this way. This will cause a hardinquiry to be placed on your credit report and as we saw in the last point,this can hurt your credit score by 2 to 5 points. If you have mostly new credit on your reportor you have a few other inquiries, your loss of points can be higher.
5. Co-signing on a Loan
If you decide to co-signon a loan for someone because their income or credit won’t allow them toqualify for a credit card, auto loan or mortgage, you are literally puttingyour credit in their hands. Sure, youwant to help the person you love, but your benevolence can cost you.Most people do not understand that when youco-sign for someone, you are agreeing to be just as responsible for the loan orcredit card as the person for whom you are signing. If they miss a payment, it’s not only theircredit that takes a hit, but yours. Ifthe person for whom you are co-signing racks up big charges on your joint card,your credit utilization will be dinged and you could lose a lot of points.