A healthy credit score is essential if you want to get the best rates when you take out a home loan, finance a car, or borrow money for any reason. Unfortunately, your credit is one area where what you don't know can hurt you. If you don't keep a watchful eye on your credit, small credit mistakes can whittle away at your score over time.
This is especially true if you don't know exactly where your credit score comes from. That's why it's crucial to gain an understanding of how credit scores are determined and how your daily credit activities could be boosting – or hurting – your score without realizing it.
5 Ways You May Be Hurting Your Score
Here are five seemingly harmless moves that can hurt your score over time if you're not careful:
#1 Paying Bills Late
Although paying a bill a few days after your due date might not seem like a big deal, this practice can actively wreck your credit score over time. VantageScore 3.0, which is the credit score estimate Lending Tree gives out for free, relies on your payment history as the biggest influencer of your credit score – good or bad. If you're constantly paying bills late, your score will show it. If you don't want late payments to affect your score, try marking your calendar with your due date or setting your bills up on auto-pay.
#2 Using Too Much of Your Open Credit
Another important factor that makes up your credit score is your credit utilization, which is the amount of money you owe (reflected as a percentage) in relation to your credit limits. Because utilization carries so much weight, carrying a huge balance on a card with a relatively low credit limit can knock your score down a peg or two – even if you're paying all of your bills on time. To cut down on the impact, you should pay down your credit cards frequently and limit any balances you carry month-to-month. Many experts say you should keep credit utilization below 30 percent across all of your accounts.
#3 Opening New Accounts Too Often
Opening new accounts for rewards or sign-up bonuses is a popular hobby. However, this strategy is another that can backfire if you take it too far. While you'll earn more credit card rewards by opening new accounts and earning incentives, you credit score may tumble if you rack up too many hard inquiries in a short length of time. To avoid the pain, you should only open new credit accounts once or twice per year – or when you really need them.
#4 Closing Old Accounts for No Reason
Just like opening new accounts can harm your score, closing old ones can cause a negative impact, too. The VantageScore 3.0 scoring model looks to the age of your credit history – as well as your credit mix – as one of the biggest influences on your score. Since closing old accounts shortens your credit history, it can have a larger negative impact than one might think. If you want to get the most out of your credit, keep old accounts open – even if you aren't using them.
#5 Forgetting About Old Bills
If you have any old issues on your credit report and haven't taken the time to clear them up, don't be surprised when they drag down your credit score over time. The impact of old bills – no matter how small – shouldn't be underestimated when it comes to how they might impact your score. Even letting a small, forgotten bill like a utility bill can cause your score to drop in a hurry. To check your report for any old bills that continue to linger, you can get a free copy of your credit report from all three credit reporting agencies – Experian, Equifax, and TransUnion – by using AnnualCreditReport.com once per year. If you find any delinquent or forgotten bills, call up your creditor and pay them off right away.
While a lot of factors influence your credit score, most of them are within your control. The key to improving your score is knowing how your behavior influences credit over time, and making moves that will actually boost your score instead of hurting it. When it comes to credit, it's up to you to know the difference.