Innocent Spending Habits That Damage Your Credit Score

You have every right to feel discouraged if you’re trying to achieve or maintain a pristine credit score and feel like you’re constantly coming up short.

Building credit can be a little like the struggle to lose weight, where you have a flawless day of eating and exercise only to be felled by some carbs – or maybe it’s more similar to how a criminal mastermind feels after trying to create an airtight alibi, only to forget that he forgot to turn off the tracking device on his phone. Whether you’re plotting the perfect credit score or the perfect murder, no matter how well you plan, there’s a good chance that something will go wrong.

We all know that not paying bills on time or carrying a hefty balance on credit cards will dent our credit score. But there’s a vast world of minor, subtle behaviors and decisions that can ding a credit score and prevent you from landing a perfect 850, an achievement approximately 1.8% of Americans have achieved.

So if you’re wondering how you may inadvertently hurt your credit, try to keep the following in mind.

Lenders like to see consumers’ credit accounts “clustered” with one vendor rather than spread among different lenders, said Michael Sullivan, a personal finance consultant with Take Charge America, a credit counseling and debt management agency headquartered in Phoenix.

“Obviously, this has no bearing on actual repayment history, but it rewards the behavior lenders prefer,” Sullivan said. A credit score may be dinged if you’re not behaving the way a lender wants to see, because, as Sullivan put it, “The customers for credit scores are lenders, not consumers.”

What you should do: If you have four or five different credit cards with various banks and a car loan with yet another financial firm and your home loan with another company, don’t sweat it. You may still have excellent credit or even an 850 credit score, provided you’re paying everything on time and doing everything generally right. But if you’re just starting to build your credit history, you may want to work with fewer lenders rather than a vast array of them.

You’ve probably heard this one, but it’s worth remembering: “Closing a credit card you have had for years can hurt your score,” said Mark Johnson, a faculty fellow in investments and portfolio management from Wake Forest University School of Business in Winston-Salem, North Carolina.

“It shortens your credit history and reduces your available limit, which makes your utilization ratio look worse even if your balances stay the same,” Johnson said.

A credit utilization ratio is the percentage of the available credit you’re using. Let’s say that you have two credit cards, each with $1,000 in available credit. You’re carrying a balance of $500 on one card, while on the other card, you carry nothing. Well, that’s a 25% credit utilization ratio — you’ve borrowed 25% of your available credit. Lenders think, “Hey, this person is a pretty good credit risk. They aren’t borrowing a crazy amount of money. And now they want a third credit card? Sure! Take it!”

But let’s say that before you apply for that third credit card, you close out the credit card you aren’t using. Suddenly your credit utilization ratio is 50%.

Those same lenders may think, “Whoa, this person isn’t a great credit risk. They’re borrowing half of the money they’re entitled to. Half! And now they want a third credit card? Maybe this isn’t a good idea.”

Even though you haven’t borrowed any more money, and you thought you were doing a reasonable thing by closing an account you never use, you now look more irresponsible to the lender. And so, yes, your credit score will likely drop.

What you should do: Johnson suggests leaving those old cards open and using them once in awhile, “as long as they have little or no annual fee.” If they do have an annual fee, you’re wasting money, in which case, sooner or later, maybe after applying for a credit card that you will use and building your credit utilization ratio, you should close the account.

Now, here’s where you might understandably think, “What the [censored]? I am paying off a debt, and my credit score is going down?”

If it does drop (and it may not), it’s just going to be temporary, said Martin Mulyadi, a professor of accounting at Shenandoah University in Winchester, Virginia.

“The trigger isn’t paying the debt but the resulting account closure,” he said. That’s because “the credit scoring model will then see a less diverse portfolio of active accounts.”

Lenders like to see that you’re borrowing money from a variety of sources, such as having credit cards, maybe a personal loan, a car loan and a mortgage.

Paying off a debt means you have a little less variety, and so, yes, paying off a debt could make your credit score briefly drop.

What you should do: Don’t give this a second thought. Paying off a debt is important and will help your credit score and checking account in the long run.

A lot of people like “buy now, pay later” services precisely because they generally don’t hurt your credit. There’s no hard inquiry to get approval for a BNPL loan. (Hard inquiries are when lenders take a look at your credit report after you give them the go-ahead; a hard inquiry will make your credit score drop, but not by much, and it’s temporary. Still, if you’re making a lot of hard inquiries, that may add up and start to do some harm. Soft inquiries are also when lenders take a look at your credit report, often for a preapproval of a loan, but these generally don’t affect your credit score, or at least aren’t supposed to.)

But while “buy now, pay later” loans haven’t been reported to credit bureaus, that’s about to change. At some point this year, Fair Isaac Corp., which produces the FICO Score, will be offering two separate credit scores that include BNPL data.

There’s a pretty good chance that if you use a lot of BNPL loans, your credit score will not change or it may even improve. After all, if you’re paying off BNPL loans successfully, that’s only going to make you look good.

But for years now, BNPL has always had the ability to bring down a credit score, and it still can. It’s important to recognize that.

“A missed $60 BNPL payment can hurt your score just like a missed credit card bill,” Johnson said.

What you should do: Use “buy now, pay later” loans responsibly, just like you would any other loan, and try not to let any of those loans wind up in collections, where your credit score will likely be clobbered.

Why the [expletive] would renting a car with a debit card hurt your credit score? (Sorry for the salty language, everyone …)

Because “some rental agencies perform a hard credit inquiry for debit card users, as they consider them higher-risk customers than those with credit cards,” said Sherman Standberry, an Atlanta-based certified public accountant and managing partner at My CPA Coach, a tax accounting consultancy.

Standberry said that these hard inquiries aren’t going to bring your score down much — “a minor deduction,” he called it. But they can stay on your report for up to two years, Standberry said.

What you should do: Pay with a credit card, if you can. Less hassle and stress. If you can’t, Standberry pointed out that not every rental company will do a hard credit inquiry for debit card users. If you can, “it’s best that you confirm that your rental agency does not do hard inquiries before booking with your debit card,” he said.

It can be maddening knowing that one false move and suddenly you’ve sent your credit score plummeting, and it may not make you feel less frustrated to hear this, but if you’re looking to stay in a lender’s good graces, keep a few things in mind.

Sullivan said that the way credit bureaus set things up, “the formulas are designed to make good scores difficult to maintain” while also preventing low scores from “collapsing.” For instance, Sullivan explained that “a person with a credit score of 570 may lose 20 or 30 points for a late payment,” while “a consumer with an 840 score may see a decline of well over 100 points for the same infraction.”

You can get free credit reports at AnnualCreditReport.com. Sullivan said that lenders often review your credit report before agreeing to give out a loan, so if you’ve had a good track record of paying bills for some time, keep in mind that missed payments from a few years ago may hold your credit score down a bit. If you really want to make your credit score pristine, you’ll want to make sure there aren’t errors on the reports, such as a loan that was never yours or an incorrect address.

But Sullivan cautioned against using services that will try to help you improve your credit score, often by disputing old transactions.

It’s one thing if you actually have incorrect information on your credit report and want to contest it, but paying for a service to improve your score generally only works for a short time, and it may not work at all.

“Creditors have become very aware of this activity,” Sullivan said.

So before long, you may have the same lackluster credit score, and you’re out whatever money you paid the credit repair service.

According to Sullivan, you never know what may scare a lender away.

“Many lenders have their own indicators,” Sullivan said. “For example, a consumer who has been a frequent customer at Macy’s but recently began using the dollar store may be rejected by a lender who views such changes as an indicator of financial distress.” He also said that if you’ve been paying your credit cards in full but suddenly switch to only paying the minimums, that, too, can be a red flag to a lender.

It may feel unfair, but ultimately, lenders are looking for good credit risks, and like cops on the beat, they police their prospective borrowers’ habits pretty aggressively. So the best way to get a loan and to have a high credit score is to essentially do everything right with your money — and accept that if you do everything perfectly, the odds are great that … you’re still not going to be in that venerated 1.8%.

But, hey, maybe you’ll be close.