A good credit score can open doors to better loan offers, lower interest rates, and even job opportunities. But what happens when your credit score starts to drop? One of the most common reasons for a declining credit score is bad habits that can build up over time without you even realizing it.
In this article, we’ll discuss the top 5 habits that hurt your credit score, and most importantly, how to fix them. We’ll dive into credit score factors, common credit score mistakes, and provide practical tips on how to avoid bad credit habits.
By the end of this post, you’ll have a solid understanding of how certain behaviors affect your credit and what steps you can take to improve it.
What are the Habits that Damage Your Credit Score?
Before we delve into the specific habits, it’s important to understand that your credit score is a reflection of your credit behavior. A range of factors influences your credit score, including:
Payment history: Whether or not you pay your bills on time.
Credit utilization: How much of your available credit you’re using.
Credit age: The length of time you’ve had credit accounts open.
Credit mix: The variety of credit accounts you have (e.g., credit cards, loans).
Recent inquiries: How often you apply for new credit.
When you develop bad credit habits, one or more of these factors can be negatively impacted. Below, we’ll explore five habits that are particularly damaging to your credit score.
1. Missing Payments: The Silent Credit Score Killer
One of the most impactful habits that hurt your credit score is missing payments. It’s an easy mistake to make, especially if you’ve got a lot of bills to juggle. However, payment history makes up 35% of your credit score, making it the most influential factor.
Why Missing Payments Matter
Late payments can stay on your credit report for up to seven years, even if you eventually catch up. When you miss a payment, your lender will report it to the credit bureaus, and this can cause a significant drop in your score. The later your payment, the worse the impact.
For example, if you miss a credit card payment by 30 days, your credit score could drop by as much as 50-100 points. Missed payments on loans, mortgages, or even utility bills can have the same effect.
How to Avoid This Habit
Set up automatic payments: Many banks and creditors offer the option to automatically withdraw payments on the due date, so you never have to worry about missing a bill.
Set reminders: If automatic payments aren’t an option, set up reminders on your phone or calendar.
Stay organized: Keep track of all your due dates in one place, whether it’s a physical planner or a digital app.
By avoiding missed payments, you’ll ensure that your payment history stays clean, helping you maintain a healthy credit score.
2. Carrying High Credit Balances
One of the biggest credit score mistakes is carrying high balances on your credit cards. This behavior negatively impacts your credit utilization ratio, which accounts for 30% of your credit score.
Why High Balances Hurt Your Score
Credit utilization is the ratio of your credit card balance to your credit limit. For example, if you have a $1,000 limit and a $700 balance, your utilization is 70%. Ideally, you should aim to keep your credit utilization below 30%. If you’re constantly near or at your credit limit, this signals to lenders that you’re overextending yourself.
Carrying high balances is a common financial habit that ruins credit scores because it shows you may be relying too much on credit, making you a higher risk for lenders.
How to Avoid This Habit
Pay down your balances: If you already have high balances, prioritize paying them down. Try to pay more than the minimum to reduce the balance faster.
Increase your credit limit: If possible, request a higher credit limit, which can help lower your utilization ratio. Just make sure you don’t increase your spending as a result!
Use multiple cards: Spread out your spending across different cards to ensure you don’t max out any single card.
Lowering your credit utilization will not only improve your credit score but also give you more financial flexibility in the future.
3. Opening Too Many New Credit Accounts
A common habit that can negatively impact your credit score is applying for multiple new credit accounts in a short period. Each time you apply for credit, the lender performs a hard inquiry (also called a hard pull) on your credit report.
Why New Credit Applications Hurt Your Score
While a hard inquiry only takes a few points off your credit score, applying for credit frequently can signal to lenders that you’re experiencing financial instability or are desperately seeking credit. This can lower your score, especially if the inquiries are clustered together.
Additionally, the average age of your credit accounts (a factor that makes up 15% of your score) can be impacted if you keep opening new accounts. Opening several new credit cards or loans will lower your average account age and can cause your score to drop.
How to Avoid This Habit
Apply for credit only when necessary: Only open new accounts if you truly need them, such as for a big purchase or to improve your credit mix.
Shop around within a short period: If you’re looking for a loan (e.g., for a mortgage), apply for several within a short time frame. Credit scoring models typically treat multiple inquiries in a short period as a single inquiry.
By limiting new credit applications, you help protect both your score and your credit history.
4. Ignoring Credit Report Errors
It’s not uncommon to find credit report errors on your file. This could include incorrect late payments, wrong credit balances, or even accounts you didn’t open. These errors can severely damage your credit score if not addressed.
Why Errors Are Harmful
Inaccurate information on your credit report can cause you to appear riskier to lenders than you actually are. For example, if a late payment is mistakenly recorded on your report, it could drag down your score by a significant amount.
How to Avoid This Habit
Regularly check your credit report: You’re entitled to one free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) each year. Use this opportunity to look for errors.
Dispute inaccuracies: If you find any mistakes, dispute them immediately with the credit bureau. You can usually do this online, and they will investigate the issue.
By staying on top of your credit report and disputing errors, you can ensure your credit score stays accurate and reflects your true financial behavior.
5. Failing to Diversify Your Credit Mix
Having a healthy mix of credit accounts can positively impact your score. A diverse credit mix shows that you can handle different types of credit, such as credit cards, mortgages, and installment loans (like car loans or personal loans).
Why Credit Mix Matters
While credit mix accounts for only 10% of your credit score, having a variety of credit types can still boost your score. If all your credit is concentrated in one area (e.g., just credit cards), it may limit your score potential. A lack of diversity can make you appear less reliable to lenders.
How to Avoid This Habit
Consider different types of credit: If you only have credit cards, consider taking out a small loan or line of credit to add variety. Just be careful not to take on more debt than you can handle.
Avoid unnecessary credit: Don’t open accounts for the sole purpose of diversifying your credit mix. Only take on credit you need.
Diversifying your credit mix gradually can have a positive effect on your credit score over time.
How to Improve Your Credit Score
The good news is that most of these habits can be reversed with consistent effort. By practicing responsible credit use, you can slowly improve your score. Here are a few tips on how to improve your credit score:
Pay your bills on time: This is the most important factor in maintaining a healthy credit score.
Keep your credit utilization low: Aim to use no more than 30% of your available credit.
Avoid new credit applications: Only apply for credit when absolutely necessary.
Monitor your credit report: Check for errors and dispute them if needed.
Frequently Asked Questions (FAQs)
1. What are the habits that damage your credit score?
Common habits that hurt your credit score include missing payments, carrying high credit balances, opening too many new credit accounts, ignoring credit report errors, and failing to diversify your credit mix.
2. How do bad spending habits affect credit score?
Bad spending habits, such as overspending and maxing out credit cards, can lead to high credit utilization, missed payments, and high levels of debt, all of which can hurt your credit score.
3. What are common habits that lower your credit score quickly?
Common habits that lower your credit score quickly include missing payments, maxing out your credit cards, and applying for multiple new credit accounts in a short period of time.
4. Does missing payments hurt your credit score?
Yes, missing payments can severely hurt your credit score. The more days you’re late, the worse the impact on your score.
5. How to avoid habits that hurt your credit score?
To avoid bad credit habits, set up automatic payments, keep your credit utilization low, check your credit report regularly, and avoid applying for too much credit.
Comments (0)