What habit lowers your credit score?

Your credit score is a numerical representation of your creditworthiness, and it plays a crucial role in many aspects of your financial life. From securing loans and mortgages to renting an apartment and even getting approved for certain jobs, a good credit score can open doors, while a poor one can slam them shut. Understanding the factors that influence your credit score and, more importantly, the habits that can damage it, is essential for maintaining a healthy financial profile.

While there are many factors that contribute to your credit score, some habits are more detrimental than others. This article will delve into the single most damaging habit and explore other common pitfalls to avoid to protect and improve your credit score.

The Most Damaging Habit: Consistently Missing Payments

Without a doubt, the single most damaging habit that lowers your credit score is consistently missing payments. Your payment history is the most significant factor in determining your credit score, accounting for approximately 35% of your FICO score. This means that a history of late or missed payments can have a severe and long-lasting negative impact.

Even a single missed payment can hurt your score, especially if you have a relatively thin credit file (meaning you don't have a long credit history). The more frequently you miss payments and the longer they remain unpaid, the more your credit score will suffer.

Why Payment History Matters So Much

Lenders view your payment history as a direct indicator of your reliability and ability to repay your debts. A history of timely payments demonstrates that you are responsible and trustworthy, making you a less risky borrower. Conversely, a history of late or missed payments signals to lenders that you may be unreliable and more likely to default on your obligations.

The Ripple Effect of Missed Payments

The negative impact of missed payments extends beyond just a lower credit score. It can also lead to:

• Higher interest rates: Lenders may charge you higher interest rates on loans and credit cards to compensate for the increased risk they perceive.
• Difficulty getting approved for credit: You may find it difficult to get approved for new credit cards, loans, or mortgages.
• Higher insurance premiums: Some insurance companies use credit scores to determine premiums, so a lower score could result in higher costs.
• Difficulty renting an apartment: Landlords often check credit scores as part of the application process, and a poor score can make it harder to secure housing.
• Job application rejections: Some employers check credit scores as part of the hiring process, particularly for positions that involve handling money or sensitive information.

Other Habits That Can Negatively Impact Your Credit Score

While consistently missing payments is the most damaging habit, several other behaviors can also negatively affect your credit score. These include:

Maxing Out Credit Cards

Credit utilization, which is the amount of credit you're using compared to your total available credit, accounts for about 30% of your FICO score. Maxing out your credit cards, or even using a significant portion of your available credit, can significantly lower your score. Lenders view high credit utilization as a sign of financial stress and a higher risk of default.

Recommendation: Aim to keep your credit utilization below 30% on each card and overall. Ideally, keep it even lower, around 10%.

Applying for Too Much Credit at Once

Each time you apply for a new credit card or loan, the lender will perform a hard inquiry on your credit report. While a single hard inquiry typically has a minimal impact, applying for multiple credit accounts within a short period can lower your score. This is because lenders may interpret multiple inquiries as a sign that you are desperate for credit or taking on too much debt.

Recommendation: Space out your credit applications and only apply for credit when you truly need it.

Closing Old Credit Card Accounts

Closing old credit card accounts, especially those with a long history and high credit limits, can negatively impact your credit utilization ratio and shorten your credit history. This can lead to a decrease in your credit score, particularly if you have a thin credit file.

Recommendation: Avoid closing old credit card accounts unless you have a compelling reason to do so (e.g., high annual fees). If you decide to close an account, consider closing one with a lower credit limit or a shorter history.

Ignoring Errors on Your Credit Report

Errors on your credit report can negatively impact your credit score, even if they are not your fault. These errors could include incorrect account balances, inaccurate payment histories, or accounts that don't belong to you.

Recommendation: Regularly review your credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion) and dispute any errors you find. You are entitled to a free credit report from each bureau once per year through AnnualCreditReport.com.

Co-signing a Loan for Someone Who Defaults

When you co-sign a loan for someone, you are essentially guaranteeing that you will repay the debt if the borrower defaults. If the borrower fails to make payments, your credit score will be negatively impacted, just as if you were the primary borrower.

Recommendation: Carefully consider the risks before co-signing a loan for someone. Only co-sign if you are confident that the borrower will be able to repay the debt.

Being an Authorized User on a Poorly Managed Account

While being an authorized user on a credit card can sometimes help you build credit, it can also hurt your score if the primary account holder mismanages the account. For example, if the primary account holder makes late payments or maxes out the card, your credit score could be negatively affected.

Recommendation: Carefully consider the risks before becoming an authorized user on someone else's credit card. Choose someone you trust and who has a good credit history.

How to Rebuild Your Credit After Mistakes

If you have made some of the mistakes mentioned above, don't despair. It is possible to rebuild your credit score over time. Here are some steps you can take:

1. Pay your bills on time: This is the most important thing you can do to improve your credit score. Set up automatic payments or reminders to ensure you never miss a due date.
2. Reduce your credit utilization: Pay down your credit card balances to lower your credit utilization ratio.
3. Become an authorized user on a responsible account: Ask a trusted friend or family member with good credit to add you as an authorized user on their credit card.
4. Consider a secured credit card: A secured credit card requires a cash deposit as collateral, making it easier to get approved if you have bad credit.
5. Monitor your credit report regularly: Check your credit reports for errors and dispute any inaccuracies.
6. Be patient: Rebuilding credit takes time and effort. Don't get discouraged if you don't see results immediately.

The Importance of Understanding Your Credit Score

Your credit score is more than just a number; it's a reflection of your financial responsibility and trustworthiness. Understanding the factors that influence your credit score and avoiding the habits that can damage it is crucial for achieving your financial goals. By practicing responsible borrowing habits and taking proactive steps to manage your credit, you can improve your credit score and unlock a world of financial opportunities.