5 Surprising Things that Negatively Impact Credit Scores

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For the credit-savvy consumer, paying credit card debt and a mortgage loan on time is a matter of commonsense. Sending in timely payments to creditors, however, is just one of many factors that determine your credit rating. If your efforts to build and maintain positive credit don't seem to be paying off, you might unknowingly be committing one of several cardinal credit sins that you aren't even aware of. In some cases, everyday activities or actions you take to help boost your credit score can actually be detrimental to your overall credit rating.

Canceling Old Credit Cards
You may not use that old Discover card, Visa or MasterCard anymore, but think twice before you cancel the account. Canceling an old credit card is more likely to hurt your credit than help it. A full ten percent of your FICO score with each credit bureau depends on the length of your credit history. When you cancel old credit accounts, those accounts eventually fall off your credit report. If the credit card in question is one of your oldest accounts, its loss will shorten your credit history and negatively affect your credit scores. It's best to keep old credit card accounts open to avoid the credit damage you may suffer by closing the account.

Applying for a Bank Account
While keeping your money in a bank account is clearly more responsible than stowing your excess cash in a shoebox under your bed, opening a new bank account will slightly decrease your credit score. This is because banks and credit unions conduct a hard credit inquiry on new applicants. A hard credit inquiry costs the average consumer five to seven points. Your credit score will recover from a hard inquiry within six months, but a series of hard inquiries in a row can result in considerable damage to your scores.

Lowering Your Credit Limit
If you have a lower credit limit on your credit cards, you're less tempted to incur large amounts of debt.  Although lower credit limits may help you preserve your credit rating in the long run by helping you keep your spending under control, asking your credit card company to lower your limit has an immediate adverse effect on your FICO scores because lower credit limits increase your credit utilization ratio.

Your credit utilization ratio represents the difference between the amount of credit you use and the amount of credit available to you. Because the credit utilization ratio takes all of your accounts into consideration, your credit score will suffer from lower credit limits even if you have a zero balance on the card in question.

Paying Off a Loan Early
Paying off a loan early demonstrates financial security and responsible debt management habits. Unfortunately, paying off a loan early is often worse for your credit than making payments over the life of the loan.

Each time you make a payment on time, the lender records your payment in its computer system. The lender's computer system sends an update to the credit bureaus noting that you paid your bill. The credit bureaus then add this information to your credit report. Because recent entries carry the most weight in the FICO scoring formula, each payment update that appears on your credit report is beneficial to your credit rating.

When you pay off a loan early, your credit report reflects that you paid your debt in full, but you no longer receive monthly updates on your credit report. Because recent entries have the greatest impact on your credit scores, the loan's positive payment record benefits your credit less and less as time goes by. If you do not have other active accounts to make up for the loss of the loan account, your credit score may decrease as the loan's trade line ages.

Not Using Your Credit Cards
If you are one of the many consumers who keeps a credit card on hand for emergencies only, you may be setting yourself up for credit damage. Credit card companies lose money on inactive accounts. To keep profit margins high, many credit card companies require consumers to use their credit cards or lose their accounts. If the credit card company closes your account, you lose the available credit line the card carried. This adversely affects your credit utilization ratio which, in turn, lowers your credit scores.

If paying your bills on time each month was enough to ensure a perfect credit rating, more consumers would boast a FICO score of 850 - an A+ credit rating under the current system. Credit calculations, however, take far more into consideration than just your mortgage loan and credit card payment history. In addition to paying debts on time, keeping low balances on revolving credit accounts and limiting hard inquiries, reviewing your credit reports and watching out for fraudulent activity will help you achieve and maintain an excellent credit rating.


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