Keeping your credit score in good standing is a big deal, Grownups. Blogger Jennifer Nelson has five things to watch out for to maintain good credit.
Nanette Miner, Ed.D. a managing consultant in Charleston, took out a second mortgage on her home. It was a mortgage held by a bank, but showed up on her credit report as revolving credit, and appeared to be maxed out because the mortgage was the full credit line.
“The bank insisted it was a mortgage; the credit companies insisted it was revolving credit,” says Miner, who couldn’t get it resolved on her credit report. It appeared that she had dive-bombed her credit line.
Lesson learned: If you take out a second mortgage, be sure to truly get a mortgage, not a line of credit. Miner had no idea it could drag down her credit score. “As soon as that was off my credit report, my score went from the 600s to the 800s.”
It’s frustrating when little things unintentionally sink a FICO score. If you’re trying to keep a stellar credit profile or build a better one, here are five more little-known circumstances that can kill your score.
You Pay off the Wrong Debt
You would think paying off any debt would help your score, right? Not quite—it seems some debts are preferable than others. Auto loans, if paid off early, can potentially decrease a credit score.
“One aspect of credit scores is payment history; paying off a loan early will eliminate this ‘good’ aspect of constant payments,” says Chris Sherman of Sherman Financial Planning.
What the industry is saying is they would prefer to have constant payments (paid on time each month) on debt instead of a lump payment. Open and active loans are rated higher than closed and paid off loans, so your score is actually better while you’re making your car payment. Who knew?
If you have both installment debt (like a mortgage or car payment) that has the same payment every month, and revolving debt with a different payment each month, like a credit card, “paying down or off revolving loan balances (credit cards) will have a better impact [on your score] than paying off installment loans,” says Sherman.
You Only Use Electronic Statements
So you turned off paper bills, thinking you were saving trees… but records show that consumers tend to pay closer attention to paper statements versus email bills, which could end up in the spam folder or ignored over time. Only turn off paper if you’re meticulous about never missing a monthly payment, otherwise opt for both paper and an email notice to cover your bases.
In fact, Joe Saul-Sehy of Stacking Benjamins, an award-winning finance podcast, says not signing up for automatic payments is an epic fail. Why not make sure your payment is covered every month, and then electronic and paper bills can alert you to make an additional payment to lower it even further?
You Ask for a Higher Limit
Some credit card issuers tend to issue credit limit increases automatically, without the cardholder requesting them, and don’t come with a hard inquiry to your credit, which can lower your score.
Discover tops the list of lenders who liberally issue automatic credit limit increases, says John Ganotis, founder of Credit Card Insider. However, when you request a credit limit increase, most of the time it will result in a hard inquiry on your credit report. “Depending on how many credit cards you have open, it might not be a good idea to request a credit limit increase from all of them at once,” says Ganotis.
Instead, be strategic about increases. “It may be best to just request one card at a time and stagger requests by about six months, since hard inquiries will stay on your credit reports for two years,” Ganotis says. What’s more, some issuers may be able to increase your credit limit with only a soft inquiry, or by reviewing information they already have—but make sure this is the case before jumping on too many increase requests.
You Co-sign for a Sibling, Friend, or Lover
Co-signing for a credit card, student loan, auto-loan/lease, cell phone, or even an apartment rental can have a negative impact to your credit score if the person bails on making payments.
“Many Millennials do not realize that co-signing is like joint-ownership of the debt on an account,” says Tracy Becker, a FICO certified professional and president of North Shore Advisory, Inc., in Elmsford, New York. “What one thinks is an easy favor can turn out to haunt them for years to come.”
Since one late payment or defaulting on an account has the power to drop credit scores more than 100 points and remain on your credit for seven years, cosigning on the dotted line should be given a great amount of thought. Plus, if your friend takes a powder on the payments, you’re now responsible for that debt and the creditor can sue you. That civil judgment then ends up on your credit report, further sinking your score.
You Forget to File Your Taxes
We all get busy and forget stuff, but if you fail to file and pay taxes you could see the result show up on your credit report. “If the taxing authority files anything in court, it will be picked up by the credit reporting agencies and reflected in your credit score,” says David Reis, law professor and academic program director for the Center for Urban Business Entrepreneurship at Brooklyn Law School. Essentially, it’s a court judgment for failing to pay a bill and it can have a big impact on your ability to get credit in the future, even if the disputed tax amounts to chickenfeed. Bottom line: Don’t ignore correspondence from the IRS or forget to file taxes.
Knowing what not to do with your credit history is as important as knowing what to do. If you’ve made any of these mistakes, don’t panic! It’s never too late to get your credit score back up to the number you want it to be.
Want to learn more about credit and debt? Take our online class, Can I Have Your Number? Understanding Credit & Debt.
Jennifer Nelson is a Florida-based journalist who writes about lifestyle and financial health topics for outlets like Forbes, Today.com, and AARP.
Any third-party resources or websites referenced above are not under Society of Grownups control. Society of Grownups cannot guarantee and are not responsible for the accuracy of the resources, websites, or any products or services available through such resources or websites.
While Society of Grownups hopes the information is useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner professional.