7 sneaky ways you could be hurting your credit without realizing it

You may not realize it, but your credit score is based on more than balance owed and on-time payments.

One of the most frequently used credit scores is the FICO Score, a three-digit evaluation of credit ranging between 300 and 850 that is personalized for each consumer based on credit reports from three major credit bureaus: Experian, TransUnion, and Equifax.

Because credit scores aren’t widely understood, it can be easy to make simple mistakes that end up hurting your credit in almost real time. I asked Rod Griffin, Director of Public Education at Experian, to highlight some of the common missteps most people don’t realize are hurting their credit.

1. Not applying for enough credit

Credit scores don’t start at 850 and decline every time you make a mistake. According to financial wellness company Credit Sesame, you generally start with no score at all, or somewhere close to the lower end of 300. Your real starting score isn’t reported until you’re several months into your first account, and it’s your responsibility to build it from there. If you aren’t applying for credit, though, you can’t build your credit and prove your creditworthiness in a timely manner. Because credit history counts for 15% of your FICO, you’ll be pretty slow in raising your score.

2. Applying for too much credit at once

While you want to apply for enough credit, you don’t want to do it all at once. When you apply for credit like a credit card or a loan, lenders make hard inquiries, which are requests to examine your credit, determine your creditworthiness, and decide whether or not to lend to you.

If you have a noticeable increase in credit inquiries during a short period, it flags your account for possible financial trouble, perhaps requiring you to take on extra debt. This can decrease your credit score for a short time until you get ahold of your new accounts. Note that the dip caused by a hard inquiry, or multiple hard inquiries, is temporary.

3. Keeping a high balance, even if you pay on time

Experian’s Griffin notes that as a general rule, it’s wise to hold a healthy balance of 30% or less on each card. This means making sure that at least 70% of the liability is paid every month, because holding a higher balance for a long amount of time can hurt your credit.

Says Griffin: “If you’re in the habit of revolving large balances on your credit cards each month, you could be hurting your credit scores without realizing it, even if you never make any late payments on those accounts.” The second-highest aspect of your FICO score is Amounts Owed, accounting for 30% of your final score.

That’s a good way to remember the 30% rule: Try to hold at most a 30% balance, because the amount you owe counts for 30% of your FICO score.

4. Closing an account at the wrong time

If you close an account as soon as it’s paid off, it can actually decrease your overall credit score. How is this possible, if you’ve paid it off? Because your total liability includes all of your accounts, then the amount you owe on the rest of your accounts suddenly looks proportionally much bigger if you eliminate an account and decrease your available credit by that much.

As Griffin explains: “Your credit utilization rate is also called your balance-to-limit ratio. To calculate it, add up all of your credit card balances and then add up all of your credit limits. Divide the total balance by the total limits. Generally, the lower your utilization rate, the better for your credit scores.”

If you’re going to close an account, your credit will probably take a hit — likely temporary — no matter when you do it. But if you’re currently using a lot of credit, you might want to wait until you’re using less to close an account, and therefore increase your credit utilization ratio.

5. Missing payments

While it isn’t the only thing, missing payments is the No. 1 no-no when dealing with your credit accounts. Your payment history will account for the largest chunk of your FICO score, coming in at 35%.

This can be a relatively insidious problem; while missed payments can be fixed as soon as you realize you’ve missed them, it’s already too late not to have an impact on your credit score. One way I combat my own forgetfulness is by setting up online auto-pay whenever I can. That way, the payment will go out whether I remember or not. (If you do this, though, you’ll want to be in the habit of regularly checking your bills and statements to make sure your charges and payments are what you expect.)

6. Cosigning a loan

While cosigning loans is often a necessary move for parents of students or friends in a bind, there is a reason why the cosign was necessary: Creditors don’t trust the creditworthiness of the original applicant. That lack of trust isn’t necessarily due to delinquency, but it could be a function of short credit history or income that isn’t several times the amount of the loan, for example.

Whatever the reason, that cosigned loan will end up on your credit report. “If the other person doesn’t pay, and the account becomes late,” explains Griffin, “that late payment is going to show up on your credit report, and it’s going to hurt your credit history too.”

7. Defaulting on accounts

This one is pretty obvious, but it’s worth mentioning because we can’t always plan for the worst-case scenario in advance. If you are faced with foreclosure, bankruptcy, repossession, or if a debt is sent to collections and you are unable to pay, this will severely impair your ability to build healthy credit. According to Griffin, those incidents can show up on your credit history for up to a decade.

Experian offers tools that can help you get a credit boost when you need it most »