Surprising Things That Can Kill Your Credit

By Kate Luther. Last updated 9 July 2014. 15 comments
Photo: Orin Zebest

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When it comes to credit scores, we're all very familiar with the damage a late payment can do to your credit "worthiness." We also know that having too much debt is bad as is having no credit references at all.

But surely that can't be all that affects your credit score, right?

The truth is, there are several things that can tank your credit, some of which just might surprise you. (See also: 6 Credit Card Services You Don't (Usually) Need)

Sneaky Inquiries

When you apply for a new credit card, you expect an inquiry to show up on your report. This is known as a "hard" inquiry, and too many of these within a 12 month period will lower your score.

But filling out that Visa application isn't the only way to generate a hard inquiry. If you use a debit card when you rent a car for example, many rental agencies will check your credit before approving the transaction, and since few of us read all the fine print, you may not realize it's happened until it's too late.

Likewise, opening a new checking account will also typically generate a hard inquiry (even though you're not applying for credit) as will applying for new phone service and — surprise! — requesting an increase on an existing account. Unfortunately, many consumers assume that credit card companies simply look at their own payment history to determine approval for increases, but the fact is that your existing creditors are monitoring your credit score on a regular basis.

Now, only the hard inquiries generated by a request for an increase will ding your score — those periodic "checkups" are considered soft inquiries and don't cause a penalty. But that doesn't mean that they can't still hurt your credit, bringing us to the next item on this list...

Changing Your Ratio

When a creditor approves an application for credit, they will continue to monitor your score to ensure that your credit worthiness doesn't change. And again, these soft inquiries don't count against you. But should the creditor decide that you no longer meet their requirements, they can lower your credit limit or worse, close your account. By the time you realize it, the damage has already been done.

Your credit score depends greatly on the ratio between how much credit you've used and how much you have available. So, if you have an account with a $2,000 balance for example, and you've charged $400, then you've used 20% of your available credit, and anything up to 30% is considered to be responsible credit management.

But let's say that the credit card company decides that you no longer meet their standards and as a result, they lower your limit to $250 (yes, they can do that — I speak from experience). Now, instead of having a credit ratio of 20%, you're suddenly maxed out as far as your credit report is concerned, and your score will drop considerably as a result.

If they decide to close the account instead (yes, they can do that too), you not only suffer the ding for a high credit utilization ratio, but you also lose the benefit of that available credit once you've paid the balance off. Remember, your utilization ratio is based upon your total credit available, so when an account is closed, it reduces the amount of credit you have access to. And the less available credit you have, the higher your utilization ratio will be.

This is also the reason that financial experts discourage balance transfers. Debt-conscious consumers will often transfer their credit card balances to a new card with a lower rate, thinking that they're making a smart move, but this can actually have an adverse effect on your credit.

Not only do you suffer the ding for a hard inquiry to secure that new, lower-rate account, but you'll also skew your utilization ratio if — like many consumers do — you close those higher-rate accounts after the balance transfer is complete.

What type of credit card are you interested in?
How much do you spend per month?
Do you carry a balance?

Let's say for example, that you have two cards, each with a $1,500 limit and a $200 balance. That gives you a utilization ratio of about 13% ($400 used / $3,000 total available). Then let's say that you get a new, lower-rate credit card with an additional $1,000 limit, and you shift your $400 outstanding balance to that new card. You now have a credit utilization ratio of just 10% ($400 used / $4,000 total available), but the minute you close those two older accounts with the higher interest rates, your ratio goes down the tubes.

Instead of having $4,000 in available credit, you now only have $1,000. Your ratio goes from an impressive 10% to a whopping 40%, and that's bad, bad, bad.

Applying for the Wrong Type of Credit

Many consumers think that any kind of credit is good, and for those trying to rebuild their credit scores, getting approval on in-house financing plans might seem like a step in the right direction.

Unfortunately, that's not the case.

These "local" finance plans — like those you see advertised by furniture stores and car dealerships — are considered to be "second class" credit...that is, credit for those who can't get it anywhere else, and this makes you look like a high risk to potential creditors.

In addition, because these in-house programs don't issue you a revolving limit, your available credit is typically the amount of your purchase. So, when you finance $1,000, it appears as a maxed-out account on your credit report and affects that all-important utilization ratio we were talking about before.

Skipping Out

When it comes to late payments, it's not just your credit cards that you have to worry about. Those old library fines, parking tickets, and unpaid balances on your book club can also hurt you if the company decides to use a collection agency to resolve the account.

And once the collection hits your credit report, you and your score are stuck with it for seven years.

Swearing Off Credit

After having a few bouts of credit card debt in my early twenties, I swore I would only pay cash for my stuff and never use a credit card again. But knowing the importance of having credit, I kept a few accounts open and just locked the cards away. I thought I was being smart... I thought wrong.

When you don't use your credit — as in, ever — there's no payment history for potential creditors to evaluate and after an extended period of time, your creditors may close your account because of inactivity, both of which can make it harder for you to secure credit when you need it.

In addition, if you do ever decide to use one of those cards, you may find that your purchase is declined because it's outside of your "usual" spending habits. Of course, this can be resolved, but not without some embarrassment as you step out of the checkout line to call your credit card company.

The Moral of This Story?

Managing and protecting your credit score is most certainly a pain, but it's a necessary one. Use your credit, but use it wisely, and always ask about credit checks before securing new services...even (and especially) when those services seemingly would have nothing to do with your credit.

But most importantly, monitor your score. The only way to know what's being reported is to check it yourself and then dispute any information that's incorrect.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

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Guest's picture

Great article Kate. You point out some things a lot of people are definitely not aware of. In addition to messing up their utilization ratios, when they do balance transfers, they also drop their average age with new cards and that can lower their scores too.

Kate Luther's picture

Hi there and thanks for your comment... You're right - the age of the credit (how long you've had it) definitely factors into your credit score, so this is a good point. Adding new credit cards could affect the average age of credit and possibly drop your score.

Guest's picture
Guest

I recommend listening to Dave Ramsey. Just about everything you said contradicts his accurate view of debt. When applying for a credit card or mortgage, they're looking at your debt to income ratio. What's so bad about paying things off or in cash? It avoids the need for a credit card. People can wait to buy a tv, appliance, etc. Save your money and pay cash. It saves money when you can pay in cash instead of paying interest. I don't think people realize or think about that. Can you imagine if people paid for things in cash? Credit card companies would shut down and people would have more money to enjoy vacations with their families, save for retirement, etc instead of buying that $2k tv that will end up cost them several hundreds more because of interest.

Guest's picture
Guest

Although a completely cash, no credit world may sound good,it is highly unlikely. Especially when there are those businesses like car rentals and hotels that use credit cards for reservations, otherwise you have to pay a large cash deposit. Not many people want to give a large cash deposit when they can just use a card. Or in my case, I'd rather use my cash ON my vacation, rather than give it to the rental car company to hold who is just going to give it back (minus the cost of said service)upon my return. That means I would have to save practically twice in cash when i can just use a card responsibly.

Kate Luther's picture

I like Dave Ramsey's stuff too and I definitely agree he's a good resource on personal finance. However, I don't think this article contradicts his advice... while a cash-only world would certainly save us in finance charges, the reality is, credit can be a good thing when used responsibly. I'm not advocating carrying big balances every month - quite the contrary, you should only charge what you can pay off at the end of the month when possible. But having a good line of credit ensures that you can borrow when you need it and that can be a lifesaver in certain circumstances. The key I think is balance.

Guest's picture
Jeff

Closing accounts after balance transfers are a big issue, but closing accounts in general is also huge. As a rule, if the card doesn't charge an annual fee, I keep it open indefinitely to have a good utilization ratio and extend the length of my credit history.

Kate Luther's picture

Good point Jeff... if the card isn't costing you money, then it definitely makes sense to keep it open just for the sake of your utilization ratio. Thanks for commenting! :)

Guest's picture

Super points made here! We enjoyed it and are sharing it with our readers in today's roundup!

Guest's picture

Hi Kate,

Great read. I didn't know that car rental agencies check your credit when renting a car? I've never heard of a car rental agency that asks for your SSN.

Guest's picture
Wendy

I take out a lot of credit cards each year. Each time an amazing offer comes around for cash or points I go for it. After awhile it's a lot of work to remember which cards have earned the bonus etc. Once I do what I'm supposed to for the bonus I usually wait about 6 months and then close the account. I don't want to have a bunch of accounts open that I dont use. Also i want to be able to possibly take that card out again in the future and get the incentive and I can't if I already have the card. I keep getting approved for new cards so I dont know if it's really hurting my credit or not. I had excellent credit in the past, not sure what it looks like recently though.

Guest's picture
Wendy

I just found our my credit scores because we are doing a refi on our home. WIth all 3 agencies my credit was over 800 so I just dont know that closing accounts and opening new ones is really hurting me. I pay my bills on time. I have many accounts with no finance charges for a year or more so those have a balance but otherwise I pay off my card every month.

Guest's picture
Marshall

I called my credit card companies to see if they would cancel my cards due to inactivity and they told me “YES”. Since I haven’t used my cards since March 2010 I went out and bought about $10.00 worth of home supplies and reset the timer. Between the two cards I have a $15,000.00 line of credit and owe nothing. I would hate to lose that debt to credit ratio.

Guest's picture

I really liked how you talked about the things that get overlooked (i.e. library fees). It is very unlikely that those things will make it to the credit agency. However, it is pretty interesting to think about. The little things matter, and people many times forget that.

Guest's picture

Closing your credit (swearing it off, as stated above) is never a good thing. It's important to pay off the credit, then keep it open to ensure the optimum credit rating. So yeah, when you pay off a creditor try to keep it open and avoid closing it. This is what we highly recommend when talking to consumers about credit scores.

Guest's picture
Nat

Let's start lobbying our Congress men/women. Some of these practices are needlessly punitive. I have excellent credit but that doesn't guarantee that I won't be hurt by one of these policies.