We all know by now that making payment late or having collections on your credit report can hurt your credit scores. But you might also be shocked to learn that a lot of other seemingly innocent actions can have a huge negative impact on your credit scores.
I have comprised a list of what I call the “5 surprising things that can hurt your credit score”. Please remember that when you are trying to obtain stellar credit these, here is a list of five surprising things that can lower your credit scores. If you are trying to improve your situation using TRW Credit’s Credit Restoration process these 5 things should be avoided at all costs.
Renting a Car Using Your Debit Card.
I actually had to learn this credit-damaging fact myself the hard way: after I rented a car in 2011 to while attending our semi-annual Credit Boot Camp in Tampa Florida. I rented a car from Avis using my debit card.
I thought I was being financially savvy using my debt card that was linked up to my checking account. After all, I thought, a debit card would save me from unnecessary credit card debt bills and allow me to stick to my goal of having no debt.
But quite the opposite happened. In the fine print of the rental agreements, Avis had included some fine print that said in part that they had the check my credit score if I used my debit card instead of using my secured credit card. I was even more shocked to find out that most of the other car rental companies actually had the very same clause in their own contracts too.
Now to be this was just crazy since the (FCRA) Fair Credit Reporting Act, says that for companies to be able to legally pull my credit scores they needed what is called "permissible purpose, as is the case when you're applying for credit or even trying to find a job.
But I just didn’t see how my wanting to rent a car fit into any of these categories. Obviously, the Car Rental People see it quite differently than I did. I seems that they actually want additional protection just to feel comfortable in allowing me to borrow their car. I seems that a great workaround would have been for them to just ask me for a deposit, like they customarily do when you rent a car using cash or a credit card.
In any rate, after I made the mistake of using my debit card to pay for my car rental, the very next day I received an email alert from Privacy Guard. They were notifying me that there was a new "inquiry" on my credit report from Budget Car Rental and that my FICO score had dropped 17 points. I made a promise to myself right there and then that I would never allow that to happen to me again.
Saying Yes to a Department Store Credit Card
When you spending $50 or $100 at Macy's, Victoria's Secret or wherever you like to shop, I know it can be a real temptation to say yes to the clerk behind the counter telling you that you can save a whopping 10 percent off your purchase by just applying for a department store credit card with them. But trust me when I say, that you are always better to just say No Thank You!
Why is that you ask? Well not only do department store cards carry a much higher interest rates than let’s say your Visa or MasterCard, but in addition when you apply for the new card you will see a much dreaded "hard inquiry" on your credit report because you're seeking credit. Now that’s a real Credit Crusher when you are working with us to improve your credit score.
What is the end result you might ask? In short you could wind up dinging your credit score big time.
Estimates are all over the place, but some experts say an inquiry can drop your credit score by 5 or so points, while others say a single inquiry could cost you up to 35 points, depending on your current credit standing.
Closing a Credit Card that has a Zero Balance
For many people who've struggled with debt in the past, when they finally manage to pay off a credit card, their natural tendency is to think "Good riddance." And many of those individuals get out the old scissor and cut up the credit card and vow to NEVER use a credit card again! Tragic, and another huge credit damage blow to your score.
My advice is to think about it very carefully before you slide back down the hill to the outhouse of bad credit, because this is one area that is very tricky. You see two really important things come into play when trying to maximize your credit scores, and now not knowing these secrets could really hurt you.
The FICO scoring system operates based on a formula. FICO has never revealed all the ingredients that they use in their secret sauce, but thankfully they have disclosed some important guidelines to follow.
About 30% of your FICO score is calculated based on the amount of credit card debt you've charged. The lower the amount of credit card debt you're carrying, the better it is for your credit scores because you'll have a lower "credit utilization rate." For instance, let's say you have just one credit card. It has a $5,000 credit limit, and your balance is $2,500. Your credit utilization rate is 50% because you've used 50% of your total credit available. Not good. Remember to always try to keep your total credit utilization at 30% or below.
By closing an account, you could throw off your credit utilization rate, inadvertently lowering your credit scores. For example, let's assume you have two credit cards, each with a $2,000 limit each. You are currently carrying a balance of $600 on each card. So your total credit utilization rate is 10% ($1200 divided into $4000).
But now you decide to take advantage of a 0% balance transfer offer. So you transfer the full $600 balance from one card onto the other card offering you the 0% deal. Then you close the card with no balance. Suddenly, your credit profile has changed – and not for the better.
With just one card boasting a $2000 limit and a current total balance of $1200, your credit utilization rate has now jumped to 60% from 30%. Even though you haven't charged a single dime more, you appear "riskier" to the credit scoring system.
Another problem: 15% of your FICO score is determined by the length of your credit history. Older, more established accounts boost your credit rating. So closing an account – especially one you've had for a long time – could be detrimental to your credit health.
A closed account will still be included in your FICO score calculation. But after 10 years, closed accounts are dropped from your credit reports, so you won't get the benefit of that credit longevity when your FICO scores are tabulated down the road.
Financing Furniture from a Local Merchant.
Now you might think that debt is debt. But all debt is not created equal – particularly when it comes to your credit scores.
Credit card debt, also known as "revolving debt," is scored less favorably than, say, a mortgage loan. And lower-tier levels of debt, such as furniture store loans, are even further down on the credit totem pole.
So when you buy furniture from your local mom-and-pop store, or even a big furniture retailer, and you finance it though that company, it can lower your credit rating because these firms are seen as lenders of last resort. Also, furniture store loans are typically reported to the credit bureaus as "revolving debt." Therefore, if you get a $1,000 credit limit from a furniture store and you proceed to buy a $900 sofa and love seat, you'll appear to be nearly maxed out, which is bad for your credit score.
Remember, too, that FICO's credit scoring system grades the type of loans you have in your credit reports. The "mix" of credit you have accounts for 10% of your FICO scores. So having a healthy mix of credit – for instance a mortgage loan, an auto loan, a student loan and a credit card – is a good thing, as long as you pay all your bills on time. But stay away from furniture loans and household finance companies.
Having a Credit Card Company Not Report Your Credit Limits
All of the major credit card companies usually report your card balances and payment history to the "Big Three" credit reporting agencies – Equifax, Experian, and Transunion. But in some cases, credit card issuers don't report all of the important information about your accounts such as what your credit card limit is or the total of your available credit to the credit bureaus.
When the Credit Reporting Agencies fail to report your proper credit limits, as could be the case for a consumers who has a credit card that has no spending limit, the credit scores could suffer. The reason for this is that since there is no specific indication of your credit limit, most credit scoring models – including the FICO score and the Vantage Score – don't know how to properly calculate your credit utilization rate.
As I explain in my book, Good Bye Bad Credit, navigating the credit-scoring universe isn't always logical, fair or easy. Unfortunately, though, the system is what it is.
So it's up to as an informed consumers to know the written and unwritten rules about credit in order to survive and beat the often complex and sometimes frustrating, world of credit scores.
So tell me? Do you think the credit scoring system is fair? Please share with me, Why or why not?