Many things can hurt your credit score, the impact depending on how it affects your overall creditworthiness. While the obvious reasons for your score dropping are paying late or not paying at all, some of these other reasons may surprise you!
1. Missing a payment
Missing a payment on a credit account can have severe impacts to your credit. An account that is delinquent for 30 days can take around a 90-point hit to your score! Credit bureaus are only notified of late payments once they have exceeded 30 days, while many financial institutions wait until 60 days before reporting. Pay your accounts on time, every time, to keep your credit history intact.
2. Accounts sent to collections
Unsurprisingly, if you have a credit account sent to collections or charged-off, it will negatively affect your score to the tune of 100 points or more! If you are in a position where you cannot make payments, try to arrange a payment plan with your lender rather than allowing the debt to get sent to collections. It can save you score from a massive drop and potentially save your future relationship with the lender.
3. Foreclosure/Deed in lieu/Short sale
While any real estate liquidation will inevitably lower your credit score, sometimes it is a necessary path out of debt and other financial hardships. There is not a set score decrease for each, but you can expect it to drop as much as 160 points in foreclosure and 125 points for both deed in lieu and short sales. These estimates are independent of any negative effects prior missed payments may have caused.
4. Debt settlement
While it is certainly better for your credit overall to settle a debt directly with the lender, rather than allow it to be transferred to a collections agency and do more damage in the long run, it is not penalty-free. Depending on the settlement, you can expect to take a hit anywhere from 25 to over 100 points.
The effects of bankruptcy on your credit are the most severe of any other single factor, knocking 130 to 240 points off of your score. The effects of bankruptcy disrupt multiple parts of your credit report. Poor payment history, credit utilization that is either maxed out or tanked from the closing of charged-off accounts, and negative remarks all take massive hits on your score.
6. Reaching your credit limit on a credit card
Keeping high balances on your credit card(s) or frequently maxing out the credit limit can look like you are not responsible with your credit and may be spending outside of your means. Hitting your credit limit on an account can drop your score by 10-45 points.
7. Applying for too many lines of credit
When you apply for multiple new credit lines in a short period, it can look like you are not being responsible with the accounts you have and may show you as a risk to repay. Each hard inquiry from these applications will take about 5 points off your score, which adds up!
8. Debt consolidation and loan refinancing
While consolidating debts can offer a boost to your credit utilization rate, the hard inquiry of the new account can add to the other factors bringing your score down. Similarly, loan refinancing requires a hard inquiry, so while you may save money in the long run, consider the credit ramifications if you think you will be applying for any other new credit accounts in the future.
9. Closing a credit card account
While closing a credit card can be a tempting thought – especially if you have just paid off a significant debt – keeping that credit account open and at a zero balance can be better for your credit! When you close a credit account, the previous credit line is no longer factored into your total available credit, which can ding your score depending on how much you credit utilization rate changes. Closing an older account will also lower the age of your credit history, which can impact your credit score as well.
10. Irresponsible authorized users or consignees
When you add another person to any credit accounts that you own or join any of their existing accounts or applications for credit, you are vouching for their creditworthiness. If they end up delinquent or otherwise irresponsible on those accounts, your credit will take a hit as well.
11. Errors on your credit report
Any of the mistakes listed above can be upsetting, even more so when reported incorrectly or fraudulently on your credit report! Small errors like unposted payments or significant errors like identity theft crimes can negatively affect anyone’s credit and are not corrected unless you dispute it.
While it may be easier to wreak havoc to your credit than to fix it, it is not insurmountable! Getting your accounts current, working with lenders to make payments and lower interest rates, and not adding to your debt are all huge steps in the right direction. With the right commitment and attitude, you can turn a poor credit history around with time and consistency.
Additionally, you should be reviewing your credit report frequently to ensure all the information reported is accurate. According to a study conducted by the FTC, one in five Americans has an error on at least one of their credit reports. Since the information in these reports is used to calculate your score, a mistake or an error of any kind could be negatively impacting your score and ultimately costing you money.