How You're Destroying Your Credit Score Without Knowing It

Americans are on a credit card binge. The ranks of credit card holders carrying debt from month to month have grown to 49%, up from 39% a year ago while credit card balances jumped some 15%. But before jumping on the credit bandwagon, don't forget that credit scores don't care about inflation. There are plenty of myths about what can damage your credit score, so let's get back to basics: What behaviors can have the biggest effect on that all-important number? Some, like declaring bankruptcy, are obvious. Others may not be. For instance, a large majority of people still believe carrying a balance will improve their credit score — but that's a big nope. Here's a refresher on 16 things to avoid if you want to keep your credit pristine. 

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The myth that you need to keep a balance on your credit cards in order to raise your score is incredibly persistent, with 65% of consumers believing it despite costing them money, according to a LendingTree survey. "Nothing could be further from the truth," says Beverly Harzog, a consumer finance analyst and credit-card expert at U.S. News and World Report. "Carrying a balance costs you in two ways. First, you pay interest on your balance and if it gets big enough, you could end up in debt. And second, as your balance grows, your credit utilization ratio goes up. This situation can make your credit score go down." A better plan: Use your card, wait for the balance to show up on your statement, then pay it in full whenever possible. That way, you'll avoid paying interest, a figure that 35% of consumers don't even know about their own credit cards, according to LendingTree.

Related: 14 Ways to Improve a Bad Credit Score

Over half of consumers haven't checked their credit score in over a month, according to the LendingTree report. If you're one of them, now's the time. You never know if and when inaccurate information might show up, potentially becoming a drag on your score. "My credit report said I worked in a pizza shop and had a lien in Lewiston, New York. Neither was correct," says Janice S. Lintz, a consumer education writer and expert. "Everyone should pull his or her three credit reports and go over them with a fine-tooth comb." Do that by going to AnnualCreditReport.com — it's free. See something wrong? Time to file a dispute.

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Missing a payment is one of the quickest ways to lower your credit score. And that's the case even if late payments don't become a pattern, says Harzog. "Some consumers don't think that missing one credit card payment is a big deal," she cautions. "A payment that's only 30 days late can reduce your score by a substantial amount. And once that late payment hits your credit report, it stays there for seven years." According to FICO, that substantial amount can be as much as 110 points for someone with an otherwise great score.

Related: 20 Things You Can't Do With a Low Credit Score

If you've got the credit, you might as well use it, right? Only up to a point, experts say. The amount you owe, also called "credit utilization," makes up a large portion of your credit score, and as FICO notes, maxed-out cards signal to your creditors that you may have issues making payments in the future. That, of course, can become a drag on your score. Credit experts recommend against using more than 30% of your available credit if you want to keep your credit score healthy, as this can signal to lenders that you may be in a cash bind.  

Even if you haven't maxed out a card, your credit utilization may still be too high. That can happen if you use too much of your credit across all of your accounts, which can lower your credit score, too. According to CreditCards.com, this overall number actually matters more than individual card use when it comes to your credit score. The magic number this time? Also around 30%, experts say. Aim to stay there — or under — across all of your accounts to keep your score from suffering. 

Why on earth would getting rid of a credit account you don't need hurt your credit score? Again, the answer is credit utilization. If you suddenly have less credit available, your credit utilization will go up, assuming you have balances on other accounts. "The FICO score rewards you for only using a small amount of the credit you have at your fingertips," Harzog cautions. "You don't get rewarded for decreasing your access to credit."

If a credit account that you want to close is one you've had for many years, your credit score could see a double whammy. You'll have less access to credit — not a good thing — but you're also affecting your credit history. And the longer that history is, the better for your score, says Richard Best of DontPayFull. "Canceling an older credit card could have the effect of shortening your credit history, which is a major factor in your credit score. If you absolutely have to cancel a credit card, cancel a newer account."

Take the credit increase — or even ask for one. The catch? You shouldn't use it. Again, this is all about credit utilization. Just as closing accounts means you have less access to credit, getting a credit increase means you have more access. Lou Haverty, a CFA with Financial Analyst Insider, was surprised to see his score climb when he got a much higher credit limit on a new card, but didn't use much of it. "My utilization ratio increased significantly because I had more total credit, but wasn't using that credit," he explains. "I imagine there are many people like me that are slightly too conservative and as a result have a lower credit rating than they deserve." Moral of the story: Don't be shy about taking higher limits, as long as you can resist the temptation to use them.

Related: Money Myths You Need to Ignore

If someone asks you to co-sign for a loan, think long and hard before saying yes. Do they need your help because they're just starting out, or because they've tanked their credit before? Do they have enough income to keep up with loan payments, and the responsibility to make it a priority? If you co-sign, "you are not only responsible for the debt, but you will also receive all the damage to your credit that comes from nonpayment of the debt," says Mike Sullivan, a personal finance consultant at Take Charge America. "It can also decrease your ability to obtain new credit."  

When you apply for new credit, it triggers an inquiry into your credit history that can drop your score. Typically, this isn't by much — usually less than 5 points, according to FICO — and rate shoppers who need something like a car loan or mortgage have a window to do it in without hurting their score. However, if you apply for several credit cards around the same time, that signals riskier behavior and can affect your score more. Sullivan also cautions that simply forking over your personal information is enough to affect your score. "If you give your Social Security number to a car dealer or furniture store to obtain credit terms, you have applied for a loan according to the credit bureaus, even if you don't follow through."

Related: 30 Worst Things About Credit Card Companies

Someone who has poor credit may ask to become an authorized user on your credit card account — that way, they can raise their own score with responsible usage. But beware: In case of irresponsible usage (for instance, the other user maxing out the card or refusing to make payments) the buck stops with you. Not only will you be responsible for paying, your credit score could take a hit from higher utilization or missed payments. Someone can even add you as an authorized user without your knowledge to a new credit card, often because they want a sign-up bonus. "Check your credit reports to see if accounts where you are an authorized user are negatively impacting your score," Lintz says. "If they are, remove yourself as an authorized user and contact the reporting agencies."

There's more to your credit score than credit-card payments, mortgages, and auto loans. "There are so many other items that could potentially hurt your credit score," says Aris Jerahian of Orange County's Credit Union in California. "If you don't pay your rent, utility bill, phone bill, or even your medical bill, it could end up at a collection agency." That, in turn, could weigh heavily on your credit score. Interestingly enough, by that point, the damage is done, and paying off the collection account likely won't benefit your credit score. 

Related: The Best Ways to Reduce These 13 Monthly Bills and Expenses

You might not have a choice, and the prospect of declaring bankruptcy certainly demands careful consideration. But this is one move that's going to hurt your credit score more than just about anything else. If you have a high score, you have the most to lose. According to FICO, someone with a nice, high credit score of 780 could see their score plummet as much as 240 points after declaring bankruptcy; someone with a still-solid score of 680 could lose as many as 150 points. 

Like bankruptcy, a foreclosure may be unavoidable, but it will drag down your credit score a lot. While the impact isn't as painful as bankruptcy, it's still serious: You could be looking at a 160-point drop if you have very good credit, or as much as a 105-point drop if your score is already a bit lower. And it turns out that two common foreclosure alternatives, a short sale or a deed in lieu, aren't necessarily any better for your credit score than a foreclosure itself, experts tell the Washington Post.  

Debt settlement — that is, paying just a percentage of what you owe rather than the full amount — is a tempting choice for someone who is facing an overwhelming mountain of debt, but there's no sugarcoating what it can do to your credit score. If you're already behind on payments, your credit score may not take much more of a hit, but if you're current, your credit score is likely to plummet when a settlement company steps in.

Related: Tactics for Getting Out of Debt

What better way to keep your credit score pristine than by refusing to use credit at all? Unfortunately, going cold turkey can have the opposite effect. "The credit agencies rely on past payment history to gauge how borrowers will do in the future. If you don't borrow, they have no information to rely on," says Freddie Huynh, vice president of credit risk analytics with Freedom Financial Network. Abstain long enough and you may find it hard to obtain credit when you need it. And remember: Not all plastic is created equal. "Debit cards can be helpful in curbing overspending, as you cannot spend more than you have in your bank account," Huynh says. "However, using a debit card does not help credit scores." Debit cards also can't provide all the benefits that responsibly used credit cards can.

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