7 Surprising Things That Could Lower Your Credit Score
You do everything you can to keep your credit in tip-top shape. You pay your bills in full and on time, you keep your credit utilization as low as possible, and you make sure you stay on top of all your accounts so none goes into collection. However, if you’re not careful, you could still unknowingly ding your credit score. There are some simple financial transactions you might be making on a regular basis that could be hurting you. Could you be making a credit mistake and not even realize it? Here are some surprising things that could lower your credit score.
1. Not using your credit cards
You might reason that keeping your credit cards in a dark place somewhere far away from you is the best way to go. However, unused credit cards can have a negative impact on your credit score. Generally, if you don’t use your credit card for an extended period of time (anywhere from a few months to a few years), your credit card issuer could respond by closing your account due to inactivity.
The absence of that credit card could lower your score by reducing your available credit, which will consequently raise your credit utilization. (This refers to the amount of available credit you’re using. It makes up 30% of your FICO score.) Once your card is closed, that available credit will no longer be factored into your credit utilization, so your total balances will appear to be a higher percentage of your total limits, according to Experian.
Next: Library books!
2. Failure to return library books
The library is a great place to read some interesting books and sharpen your knowledge. You can rely on your local library to catch up on quiet time and save money on book purchases. But the library can also become your worst nightmare when it comes to your credit score.
If you fail to pay a library fine, some libraries will sic a collections agency on you. If the agency decides to report your unpaid fines to a credit reporting agency, you’ll see your score drop by a few points. One agency used by some libraries is the Library Division of Unique Management Services, which specializes in helping libraries recover overdue fees, fines, and materials. Since 1996, the service has helped libraries recover more than $250 million.
If you think no one ever really gets punished for not returning a library book, think again. Not even the relatives of celebrities are immune. One person who was accused of failing to return a library book got much more than a lowered credit score — she got jail time. The mother of Gossip Girl actress Tika Sumpter, Janice Acquista, was arrested for a $10 late fee. The North Carolina library eventually discovered they hadn’t updated their records and that Acquista had actually paid the fee.
3. Renting a car with a debit card
If you don’t want to pay your rental car deposit with a credit card, some rental agencies will allow you to use your debit card. However, some agencies include a clause in their rental agreement that says they can pull your credit report if you decide to pay with your debit card.
Unfortunately, this credit check will result in a hard inquiry. This is when a financial institution requests a credit check in order to decide whether to extend credit to you. Each time a hard inquiry occurs, your score will be negatively impacted. Hard inquiries stay on your credit report up to two years. However, the experts at Equifax say if you’re shopping for a new student, auto, or mortgage loan, it is usually counted as a single inquiry.
4. Co-signing a loan
When you co-sign a loan, you are now taking legal responsibility for the account. It will appear on your credit report as one of your financial obligations. Consequently, if the person you co-signed with misses payments or decides not to pay at all, your credit score will take a hit.
Also, be aware your total debt burden automatically increases when you add a co-signed loan to the mix. Roughly 30% of your FICO score takes into account the total amounts owed. The more debt you have, the greater risk you are to potential lenders because the additional loan increases your overall credit utilization, making it appear as if you are under greater financial strain. Co-signing on a loan could not only hurt your credit score but also reduce your ability to secure an additional loan at an attractive interest rate.
5. Opening a new bank account
Another action that could hurt your credit score is opening a new bank account. This might seem like a simple thing, but it could have a negative impact on your credit. This is because opening a new account could trigger a hard inquiry. A hard credit inquiry requires your permission, and it is triggered when a potential lender reviews your credit report to decide whether credit should be extended to you. Hard inquiries lower your score by a few points and stay on your credit report for 24 months.
6. Requesting a credit-limit increase
A credit-limit increase will provide you with more cash to borrow. However, having additional available credit should be handled responsibily. For some consumers, it’s just all too tempting to borrow that extra money and get into even more debt.
Another way a credit-limit increase could hurt you is if the increase results in a hard inquiry. Before you ask your lender for a limit increase, ask whether a hard or soft inquiry will be initiated. On the positive, a credit-limit increase could help your credit score in the long run since it helps your utilization rate. Once again, you have to avoid the extra temptation of a bigger credit limit.
7. Getting a new cellphone
When you get a new cellphone, depending on the type of plan you choose, you might have to go through a credit check. The process of signing up for a new cellphone contract usually includes some risk management on the part of the cellphone carriers. They want to make sure you’ll be able to hold up your end of the bargain and make regular payments in full and on time each month. Most of the time, the inquiry will result in a hard inquiry, which will put a slight dent in your credit score for a short amount of time.