Hard inquiries, missing a payment and maxing out a card hurt your credit score. But there are other mistakes that can really tank it. Here’s what to avoid.
When someone pulls your credit report, it dings your credit score – unless that someone is you or a lender evaluating your credit for promotional purposes.
This is just one of the many complex rules baked into FICO’s traditional method for calculating your credit score. The formula can be a bit confusing to consumers, outside of the more obvious maxims. For instance, missing a credit card payment is bad, and keeping your card balances low relative to your overall available credit is good.
However, many aren’t aware that applying for a new credit card only hurts a little – unless you do it a bunch of times within a 12-month period. And if five different prospective mortgage lenders access your credit report within a 30-day period while you’re shopping for the best interest rate, that counts as only one credit check, or hard pull.
Got all that? It’s a lot to take in, so we’ve compiled a list of things that hurt your credit score, starting with the most damaging and working our way down to the most manageable.
Declaring bankruptcy has the biggest credit score impact, costing anywhere from 130 to 240 points. A bankruptcy can stay on your credit report for up to 10 years. If this happens to you, remember there’s life – and credit – even after bankruptcy.
2. Home ownership gone awry
A foreclosure can cause a credit score to drop by as many as 160 points and can stay on your credit report for up to seven years.
A homeowner can avoid foreclosure by turning the property over to the mortgage lender, resulting in a deed in lieu. The lender then sells the property to cover its loss. A deed in lieu doesn’t hit you as hard as a foreclosure, but it can lower your score by up to 125 points, on top of any damage from missed mortgage payments.
Another way to avoid a foreclosure is with a short sale. That’s when a mortgage lender accepts a payoff of less than the original balance, when the “underwater” home can’t be sold at a price sufficient to pay off the remaining debt. Like a deed in lieu, a short sale can lower your score by as many as 125 points.
3. Debt settlement
Settling a debt with a creditor for less than what was originally owed can lower your score by anywhere from 45 to 125 points.
Moving your card debts into a consolidation loan could cause a slight drop in your score because of the hard inquiry, but may help your score overall as your card balances are paid off with the loan.
4. Missing a card or loan payment
Payment history accounts for 35% of your FICO score. According to FICO, a payment that is 30 days late can cost someone with a credit score of 780 or higher anywhere from 90 to 110 points. However, card issuers typically don’t report late payments to the credit bureaus until they’re 60 days late. A missed payment can stay on your credit report for up to seven years.
5. Collections and charge-offs
A collection occurs when a creditor either sells your unpaid debt to a third party or hires an outside firm to collect the payment. A “charge-off” refers to when a creditor removes an unpaid debt from its books, typically when it reaches 180 days past due. The more recent a collection account, the more it will hurt your credit score. A collection can reduce a high credit score (700 or above) by more than 100 points. Collections can stay on your credit report for up to seven years. (Note that the widely-used FICO Score 8 ignores collections in which the original balance is less than $100.)
6. Maxing out a credit card
Credit utilization accounts for 30% of your FICO score. The lower your balances are relative to your overall available credit, the better your score will be. A maxed-out card can lower your credit score by 10 to 45 points.
7. Hard inquiries
A hard inquiry occurs when a lender pulls your credit report for review when applying for a loan or credit card. According to FICO, only inquiries that result from applying for credit will ding your credit score. For most people, a hard inquiry costs 5 points or less and stays on your credit report for two years, but will only impact your credit score for one year.
8. Applying for too many credit cards
If you apply for several cards in the span of a few months, the point losses from multiple hard inquiries add up. It can also give lenders the impression you’re desperate for credit. FICO says consumers with six or more inquiries can be up to eight times more likely to declare bankruptcy.
9. Refinancing a home, student or car loan
According to FICO, refinancing a loan can have a small impact on your credit score if it appears on your credit report as the same loan with changes. In this case, your score may take a slight hit from the new hard inquiry.
10. Canceling a credit card
Closing a card account can decrease your overall credit utilization ratio, potentially lowering your credit score, as well as shorten the overall age of your credit history if you’ve had the card a long time.
11. Being an authorized user on someone’s ‘bad’ account
When added as an authorized user on someone else’s credit card account, you inherit the payment history of that card. This can give your credit a boost if the primary user has never missed a payment and keeps the card’s balance low. But the opposite can happen if the account is delinquent, the balance is high or it has any other score-killing negative items.
12. Too little credit
If you want to maximize your credit rating, it’s best to have a mix of credit cards and installment loans. Credit mix accounts for 10% of your FICO score.
To qualify for a FICO score, you must have at least one credit card or loan account that has been open for six months and has been reported to the credit bureaus within the past six months.
13. Credit report errors
Credit reporting errors can damage your ability to qualify for credit cards and loans. Consumers should check their credit reports regularly and dispute any errors with the credit bureaus and the creditor that supplied the inaccurate information.
As you can see, the biggest hits to your credit score come from the measures you have to take to dig yourself out of major debt. But even those corrections are designed to get you back on track. If you can avoid the big issues at the top of this list and keep your eye on the more manageable bottom half, you can focus on building your credit. And good credit is where the opportunities begin.