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 a significant credit score impact, typically costing 100 points or more, according to FICO. And 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 more than 100 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, 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.
3. Debt settlement
Settling a debt with a creditor for less than what was originally owed can lower your score. On the other hand, 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 percent of your FICO score. According to a FICO simulation, a payment that is 30 days late can cost someone with a FICO 9 credit score just over 790 as much as 80 points. Missing a payment by 90 days can be even more damaging, lowering a 790 credit score to 660, which is below FICO’s “Good” range. 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. Collections can stay on your credit report for up to seven years.
6. Maxing out a credit card
Credit utilization accounts for 30 percent of your FICO score. The lower your balances are relative to your overall available credit, the better your score will be. In FICO’s example, a person with a 793 score could see it drop all the way down to 665 by maxing out their credit card.
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 five 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.
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 percent 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.
What are some ways to avoid a credit score drop?
A big drop in your credit score can be quite unnerving, but there are several steps you can take to prevent it:
- Make monthly payments on time. For example, if you’re making a payment on the last day of your credit card’s grace period, that’s better than not making a payment.
- Lower your overall debt, either by paying it off or by consolidating it with a lower rate.
- Don’t use credit for purchases that you can’t afford.
- Don’t apply for cards unnecessarily.
- Maintain a good credit utilization ratio, and spread your monthly spending across your cards.
- Keep your unused lines of credit open.
- Monitor your credit score regularly. By law, you can get a free credit report from each of the three major credit bureaus once a year at AnnualCreditReport.com. And the bureaus are currently offering weekly credit report access for free through 2023. Credit monitoring can also help you keep tabs on both your credit score and report, and keep you updated when there are any changes to your credit report, though you may have to pay a subscription fee for it.
As you can see, the biggest hits to your credit score come from missed payments, too much debt and certain 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.