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How Do Different Financial Moves Affect Your Credit Score?

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What Does And Does Not Affect Your Credit Score

You probably already know how important your credit score is to your financial future. Good credit history is what allows you to qualify for the best rates and earn favorable payment terms on loans. 

Similarly, if you have a poor credit score it’ll be harder for you to take out a loan. And even if you do qualify for a loan, you’ll end up paying a lot more in interest. 

That’s why it’s important to understand what will and won’t negatively impact your credit. But many consumers don’t have a good understanding of how their FICO score is calculated and the factors that impact their credit.

So what are the financial moves that hurt your credit and what can you stop worrying about?

5 Things That Can Hurt Your Credit Score

Your FICO score is the score over 90% of lenders use to evaluate your credit. You credit score can fall anywhere between 300 and 850, with 850 being the highest score you can achieve. Anything above a 670 is considered a good score, though the higher your score is, the better. 

Your FICO score is calculated using five different categories: payment history, the amount owed, credit history, new credit, and credit mix. So with that in mind, let’s look at five financial mistakes that will cause your credit score to drop. 

1. Closing old credit cards

If you’ve struggled with credit card debt in the past and finally paid all of your cards off, you may be tempted to close them out. After all, if you close your old cards then you won’t be tempted to rack the balances up again. 

However, this is a mistake and will likely hurt your credit score. Closing out old cards will cause your credit utilization rate to drop and this accounts for 30% of your FICO score. 

So it’s a better idea to pay the balances down and then just stop using the cards. Your balances will stay low and your credit utilization rate will stay within a good range. 

2. No variety in your credit history

Lenders like to see that borrowers have successfully used a variety of different credit methods. So if you’ve taken out five credit cards and that’s the extent of your borrowing history, your credit score may take a hit. 

On the other hand, if you’ve taken out a credit card, car loan, and mortgage and handled them all well, you’ll have a more favorable credit score. That’s because your lender will have a variety of data points to work with. 

3. Too many hard inquiries

If you apply for a loan, the lender will pull your credit report to review your history. This is what’s known as a hard inquiry and it can ding your credit score slightly. 

One hard inquiry will only cost you about five points from your credit score. But too many hard inquiries within a short period of time can hurt your credit score. Plus, applying for multiple loans or credit cards sends the signal that you’re desperate for credit. 

4. Constantly making late payments

Your payment history accounts for 35% of your FICO score. So if you are constantly missing payments or getting sent to collections, your credit score will suffer. For instance, if your credit score is currently 780 and you’re more than 30 days late on a payment, it can cost you up to 110 points on your credit score.  

5. Never checking your credit score

If you pay your credit cards off every month and never miss a payment, it’s easy to assume that you don’t need to check your credit score. You’re doing everything right, so why would you need to monitor your credit?

Unfortunately, errors can happen and if you don’t check your credit report, you won’t catch them. That’s why it’s a good idea to request a free copy of your credit report once per year so that you can check for errors or possible fraudulent activity on your report and notify your card holder right away. 

5 Moves That Won’t Impact Your Credit

It’s important to understand the factors that will hurt your credit. But many people have misconceptions about their credit score and worry about things that don’t actually matter all that much. So let’s look at five things that won’t impact your credit score. 

1. Getting denied for a loan

If you’ve ever been turned down for a loan due to poor credit, then you were probably worried your credit score would take an even bigger hit. Fortunately, there’s no reason to worry about this.

If the lender did a hard inquiry on your credit report then you will see a slight dip from that. But your score won’t drop just for getting turned down for a new line of credit. 

2. Overdrawing your bank account

Overdrawing your bank account can be embarrassing and problematic, but it has no impact on your credit score. You will get stuck paying an overdraft fee but your bank won’t report you to the credit bureau.

Instead, banks use ChexSystems to monitor banking activity. So overdrawing your account too often could make it difficult for you to open a new bank account but it won’t hurt your credit score. 

3. Falling behind on tax payments

Falling behind on your tax payments is not a good idea but it won’t hurt your credit score. The IRS doesn’t report tax information to the credit bureaus. However, if you fall behind on your taxes you could end up with a tax lien. 

4. Paying a utility bill late — or not paying your bills at all

If you regularly pay your credit card bills late, this will hurt your credit score. But paying a utility bill late is unlikely to hurt your credit score since these payments aren’t directly reported to the credit bureaus. 

However, if you fall too far behind on your bills and get sent to collections, this will hurt your credit score in the long run. But a short-term missed payment won’t hurt your credit. 

5. Losing your job

And finally, losing your job won’t cause your credit score to drop. However, it can make it harder for you to pay your bills or take out a new line of credit. If you’ve recently lost your job, you should contact your current lenders and see if they have a financial hardship plan for borrowers. 

Bottom Line

Your credit score is an important piece of your financial life. Maintaining a good credit score will make it easier for you to take out a new line of credit and obtain the best rates. Make sure you make your payments on time, maintain a low credit utilization rate, and check your credit report regularly for any changes.

Keep in mind that not all financial transactions can affect your credit score, either. Your credit score is broken down into five key components, but missing utility payments, getting denied a new line of credit, or losing your job, for instance, won’t affect your score.

Contributor’s opinions are their own. Always do your own due diligence before investing.

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Written by Jamie Johnson

Jamie Johnson is a Kansas City-based writer who writes about personal finance. She writes for a number of well-known financial sites, including Credit Karma, Quicken Loans, and Bankrate.

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