Now more than ever, it’s important to make sure that your credit score, that 3-digit number that creditors use to asses an individual’s creditworthiness, is at an acceptable level. The higher your credit score is, the more reputable your name is in the credit world. In the widely used FICO scoring system where you can be anywhere within the 300 to 850 range, a FICO score of 750 and above is generally considered excellent by creditors.
Get a “bad” score (below 650) and you might as well say goodbye to that car you’ve had your eye on or that dream job you’ve applied for.
Anyone with a mortgage, car loan, or credit card account in past due status could hardly expect to have an ideal score – that’s a no brainer. But do you know that you could get a ding on your credit score even for things that may actually seem good for your credit or appear otherwise unrelated to credit? Here are five situations:
1. Canceling a card – even an unused one.
It didn’t seem worth the trouble having that unused credit card in your wallet cancelled so you didn’t. But now that the issuing bank is charging an annual fee, it only makes sense to cancel it, right? Well, yes if you want to save yourself that $30 or so. But if you want to maintain status quo on your credit score, you’d best think twice before affixing your signature on that cancelation form.
The credit limit in that unused card still forms part of your total available credit, and has helped to keep your credit utilization ratio (or balance-to-limit ratio) low, which is an important factor that agencies use in calculating the credit score. Say for instance you have a $3,000 total outstanding balance spread out across several cards. If your combined credit limit for all cards totals $15,000, that would give you a very safe credit utilization ratio of 20%. If you close that unused account with a limit of $4,000 for example, your utilization would drastically increase to 27%.
2. Having small, unpaid debts – even the seemingly innocuous ones.
Did you forget to pay a parking ticket 2 years ago? Or failed to return a book to the library back when you were still in college? Believe it or not, these things can come back to wreak havoc on your credit score when you least expect it. This happens when the city where you incurred these small debts turns over the list of old, outstanding debts to a collection agency. When this info gets to your credit report, that $50-fine could knock off serious points from your credit score.
3. When there’s an “improvement” in your credit file.
Such a scenario is created when you are initially grouped with individuals with the same credit issues as you have, and you emerge as one with the better credit habits. Your credit score improves but as a result, you could get “transferred” to another group of consumers that have stronger histories than you, resulting in your score taking a hit. A specific example is when you file for bankruptcy and pay off your debts faster than those with similar histories. Your score could get a boost because of this but then again, if the bankruptcy were to be removed from your file, you could be lumped with and compared to individuals with more impressive credit files.
4. Transferring card balances.
Here’s another seemingly “good” move that can instead do more harm than good. If you want to save on interest costs, applying for a balance transfer promo that offers a lower rate is your best course of action. But if the card you are transferring to is giving you a lower limit, this could again impact your credit utilization rate, dealing another blow to your credit score.
5. Using store cards
Credit cards from branded retailers can save you a bundle on discounts, and who could resist a 20% discount? Well, you just might decide to pass up on that offer after all if you know that having many credit lines open, particularly those that aren’t associated with national providers Mastercard and VISA, could raise red flags with credit rating agencies.