Okay, you’ve worked hard to build up your credit score. You pay all your debts on time, have focused on getting out of debt—maybe even closed a few of those accounts because you don’t need them or want them anymore. Then one day you apply for a loan and there are issues. What???
Everyone knows the need to pay down debt and pay bills on time but there are other wonky things that can affect your credit score. Remember those cards you cancelled? Well as counterintuitive as it sounds, closing accounts can hurt your score. The reason for the ding is that closing an account drops the global credit limit, which increases the percentage of debt in relationship to the limit. For example, say you have two credit cards with a limit of $1,000 each for a total of $2,000. You owe $500 on one card and $800 on the other. That debt load is 65 per cent of the global limit. So you decide to pay off the $500 and close one account. That reduces the global limit to $1000 with an $800 balance. Now the percentage is 80 per cent and your credit score takes a hit. What’s the ideal percentage between global limit and debt owed? No more than 30 per cent – the lower, the better.
Here’s another stunner: Having a credit card or line of credit and not using it. Yep, if you have too much unused credit, that can have a negative impact. As a rule, try to use 15 to 30 per cent of your available credit. The reason is that a creditor can’t tell how you manage credit payments if you don’t use it. And don’t miss payments. Ever. Just one miss will have an impact.
Here’s something I know you’ve done in the past. You’re in your favourite department store and the customer service rep offers you an amazing discount if you open a credit account. As tempting as that is, just say no. Department store cards carry much higher interest rates than Visa or MasterCard and your credit score will take a hit. An inquiry can drop your credit score by five points, depending on what your current credit profile looks like, but could cost you up to 35 points.
Major life changes can have an impact on your score. Divorce is a big one. In a divorce, both parties divide their assets as well as their debts, but just because your ex takes over the line of credit doesn’t mean that you’re absolved. It stays on your credit report until it is paid and closed. If your ex files for bankruptcy, creditors can come after you.
Another weird thing that can affect your score is shopping around for the best rates on anything – a car, or a mortgage or any other big purchase. Each time you apply for credit, it creates a hard inquiry, which will lower your credit score. If your credit report is hit with a lot of “inquiries” within a short period of time, it looks as if you’re opening a few too many lines of credit. It can also mean you are experiencing financial difficulties and are desperate for a loan. But you could also be moving and need new utility accounts, phone and cable etc. The flurry of inquiries will lower your score.
By the way, you’ll be surprised at who pulls your credit score: A new employer, rental car agencies – yep, even if you use your credit card, the contract you sign says they can request a credit report. Housing rental agencies too, if you’re apartment hunting. All of these inquires hit your score.
The last thing to think carefully about is transferring from a high interest card to a lower interest card, or to avoid annual fees. This may do more harm than good. Opening a new card results in hard inquiry, which lowers your score. If you close that long-standing account you’re transferring out of, your global limit will be negatively affected. Now, there’s nothing wrong with wanting to lower your interest rate, and get yourself out of debt faster. But if you plan to do that, make sure you’re not planning any major purchases.
So how do you get (and keep) a really high score? Here are a few tips:
- Length of credit history – 30 years plus.
- Two major credit cards with no more than 15% balance
- Two store or gasoline cards with no more than 15% balance
- A car loan or another secured loan
- No late pays
- No bankruptcy
- No judgments
As in everything else in life, moderation is a good thing, especially when it impacts your credit score.