Mistakes That Can Lower Your Credit Score

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Scott Boyd

July 18, 2018

Saving strategies

Everyone knows that in order to maintain a good credit score, you must pay your bills on time. Likewise, most people know that you need to have a good credit score to be approved for loans and other forms of credit. But did you know that with a better credit score, you can often qualify for a lower rate of interest on your loans as well?

Clearly, these are all very good reasons to protect your credit score. But unfortunately there are a number of seemingly inconsequential things many of us do each day that can drag credit scores down. Here are five things that you may be doing now which could be damaging your credit score.

1. Making just the minimum payment on your credit cards

Paying just the required minimum balance on your credit card each month may keep the card issuer off your back, but it does nothing to help your credit score. In fact, if you consistently make just the minimum payment, your credit score will decline as lenders want to see that you have the capacity to take on additional debt. Paying just the minimum amount suggests you're having difficulty affording your current debt obligations.

2. Having a high credit utilization

Even if you do pay more than the required minimum each month, consistently carrying a high credit card balance will still lower your credit score. Creditors take note of your credit utilization (the balance you carry on your credit card compared to your limit), which is why it's always best to pay off the outstanding balance each month. If you must carry a balance, make sure the amount owing doesn't exceed 30% of your credit limit.

3. Maintaining an excessive credit capacity

You also need to be aware that even if you keep the balance of your credit cards and other lines of credit at or near zero, creditors look at your total available debt when reviewing your file. Lenders must consider the possibility that you may at any time make use of all the credit to which you have access.

Lenders are well aware of the fact that many people will use most of their available credit. That's why if you have a good credit history with your credit card issuer, you’ve likely received an offer for a higher credit limit. If you don’t require an increased credit limit, be wary of accepting this offer as it could make it more difficult for you to qualify for another form of consumer loan in the future. 

4. Failing to include a mix of credit types 

Having a mix of credit types, comprising both revolving (credit cards and lines of credit) and installment credit (including fixed amount loans with a predetermined repayment schedule) can help your credit scores. Successfully managing different types of credit demonstrates to lenders that you're a responsible borrower, and this will be reflected in a stronger credit score.

5. Applying for additional credit

Many people are unaware that simply applying for credit can have a negative impact on your score. This is because when you apply for a new credit card or a personal bank loan, the lender will do a “hard pull” on your credit. A hard pull is a request that lenders make to a credit bureau to access your credit history as part of your application review. A high number of hard pull requests on your file indicates that you are trying to arrange credit with a number of providers. Taken on their own, one or two such requests have a relatively minor impact on your credit score. But if you have several requests within a short period of time, it could become more significant.

On the other hand, a “soft inquiry” is a credit review conducted by financial institutions when you open a new bank account, as part of their Know Your Client (KYC) obligations to confirm the identity of new customers. Soft inquiries are also routinely conducted by potential employers as part of a candidate review. The good news is that a soft inquiry does not affect your credit score.