Warning Are You Sabotaging Your Credit Score?
These are really two sides of the same coin. Most people understand that certain actions in - failing to pay bills or loan repayments on time, spending over your credit limit - will quickly see your credit score plummet. Repairing your credit rating is a matter of kicking these bad habits and practising better ‘credit hygiene’ - keeping your nose clean and doing the things banks, credit card companies and loan providers like you to do.
The difficulty is, things that can harm your credit score aren’t all as obvious as defaulting on payments. In fact, some of the things that could knock your credit rating down, you’ve probably never even considered. You could be sabotaging your own credit score without even knowing it.
If you’re keen to improve your credit score, it is important to be aware of these hidden ways that could be damaging your chances.
Making payments last minute
It’s reasonable to assume that if you make a payment on a loan or credit card in time - even if it’s right on the deadline - you won’t suffer any ill-effects to your credit rating, right? You’d think so. Unfortunately, credit reporting agencies - the organisations responsible for pulling together your credit history - will often gather information from financial companies before the billing cycle closes. If you think about it, they have a lot of data to gather, so it has to be spread out somehow. Unfortunately for consumers, that means if you pay right at the end of the credit cycle, your card issuer or loan provider may have already reported your credit balance, without your payment included. That could be enough to knock down your credit score.
Using too much credit
The mechanics of keeping a high credit score can seem contradictory. On the one hand, you’re told that having lots of available credit - big limits of cards and overdrafts - is a good thing. On the other, if you use too much of that available credit, it can harm your rating. In other words, it’s good to have plenty of available credit, as long as you don’t intend to actually use it. The advice is to keep credit balances below 30% of your limit. So if, for example, you have a credit limit of £500, you would need to spend no more than £150 to stay within a good available credit usage. If you do go over that, make sure you make a payment nice and early to bring it back under before your finance provider submits its reports to the credit agencies.
Applying for multiple loans or credit cards
Given the fact that available but unused credit is good for your credit score, it might seem like a good idea to apply for and hold lots of credit cards. The problem with this is, every time you apply for a credit product, the provider will carry out what is known as a ‘hard’ credit check - a full disclosure of your credit history - before deciding whether to approve your application. These hard checks are recorded on your credit reports, and having too many listed could knock down your credit score. It is assumed that, if you’re applying for lots of cards or loans, you must either rely too much on credit, or you keep getting rejected. On that note, if you do have a low credit score, you risk making things worse by applying over and over again with different companies each time you get turned down. Each rejection for, say, a personal loan is another mark against your credit rating. Better to protect your score by looking to specialised bad credit loans which you’re more likely to get approval for.
Closing a credit card
Finally, common sense would suggest that if you have a credit card you no longer use - and which you have no outstanding balances on - you might as well close it. But because of the available credit principle, you could actually be harming your credit score by lessening the total amount of credit you could use, if you wanted to. This becomes a double whammy if, further down the line, you decide you want a credit card again, as new applications will result in hard credit checks that appear on your credit history. At the same time, you have to be careful about leaving a credit card unused for long periods of time. Your provider could decide to shut down a dormant account themselves, also reducing the amount of credit available to you.
Andrew joined Choose Wisely 5 years ago, originally working in a design capacity to make sure the website was simple to use. Most notably he worked with the Consumer Finance Association to design the comparison table of choice for High-Cost Short Term Finance products.