If you apply for a loan, mortgage, or credit card, your potential lender will check your credit score to see if you’re a trustworthy borrower. Landlords also can run credit checks on prospective tenants, and employers sometimes check the credit scores of job applicants.
A good credit score can get you lower interest rates on loans and can increase your chances of getting a mortgage or being approved by a landlord. You can increase your credit scores by making your payments on time, maintaining a variety of credit accounts, and keeping your credit card balances low. It’s also important to be aware of financial mistakes that can lower your credit score. Once something negative appears on your credit report, it will continue to impact your score for years.
Here are five things that can hurt your credit score.
1. Late Payments
Your payment history is the most important factor of your credit score. It counts for 35 percent of your total credit score, so the best thing you can do to improve your credit is keep careful track of your payment due dates.
Credit reporting agencies see your payment history as a good predictor of your future behavior, so missing just one payment could have a serious impact on your score. Typically, once your payment is more than 30 days late, the credit reporting agencies will be notified.
FICO considers the frequency and severity of your missed payments when calculating your credit score. A longer delinquency will hurt your credit score more than a shorter one. For example, a 90-day late payment is worse than a 30-day late payment. Also, recent missing payments will have a stronger effect than older ones. Late or missing payments usually stay on your credit report for seven years.
2. Defaulting on a Loan
Defaulting on a loan occurs when you fail to make payments on a debt, which will result in the debt being sent to a collection agency. In some cases, you may default on a loan after just one missed payment. It usually takes several missed payments in a row to default, though. The timeline depends on the terms of the loan and on the laws in your state.
Just one late payment can negatively impact your credit score for seven years, and defaulting can be even worse. Paying off the account can improve your credit score as it reduces your overall debt, but the default will likely remain on your credit score for seven to 10 years. This can make it extremely difficult to get a loan in the future as lenders may not trust you to pay it back.
3. Filing Bankruptcy
If you have more debt than you can pay off, you may have to file for bankruptcy. This can eliminate some of your debt and stop your creditors from contacting you, but it also has serious consequences.
Bankruptcy can drastically lower your credit score and make it difficult or impossible to get a loan, especially in the first few years after you file. A good credit score in the 700s can drop by 200 points after you file for bankruptcy, and a credit score of 680 can drop by 150 points.
A Chapter 7 bankruptcy will stay on your credit report for 10 years, and a Chapter 13 bankruptcy will last for seven years. Fortunately, the impact that your bankruptcy has on your credit score will decrease over time. According to a FICO estimate, it would take about five years to restore your credit score of 680 after filing for bankruptcy.
4. Maxing Out a Credit Card
Maxing out a credit card doesn’t have as big of an impact on your credit score as defaulting on a loan or filing for bankruptcy, but it’s an easy mistake to make. Credit utilization, or the percentage of your available credit that you’ve borrowed, accounts for 30 percent of your total score.
According to FICO, people with the highest credit scores have an average credit utilization of less than six percent. Experts recommend only using 30 percent or less of your available credit. If you max out your cards, you may see a significant drop in your credit score. This can happen even if you always pay off the balance in full by your payment due date.
If your credit report shows high balances on your credit cards, lenders may think that you have more debt than you can handle. Since credit cards have such high interest rates, maxed-out cards can be difficult to pay off if you only make the minimum payment each month.
5. Applying for Too Many Credit Cards
Having a wide variety of credit accounts is good for your score but applying for too many credit cards in a short amount of time can be harmful. When a lender runs a credit check to decide whether to approve you for a loan or credit card, your credit score will decrease. Multiple inquiries can lead to a significant drop in your score.
On average, people with credit scores of 785 or higher have seven credit cards. This includes open and recently-closed accounts, though, and they probably created all these accounts over the course of several years.
Applying for multiple credit cards at once gives the impression that you don’t manage your credit well. Lenders may think that you attempted to get several new credit cards to pay off other debts or to make a big purchase you can’t afford. Instead of applying for numerous credit cards in the hopes of being approved for one, you should carefully research different cards to find one that you have a high chance of being approved for.