You probably know that paying late bills, maxing out your credit cards, and not paying off your loans can lower your credit score, but that’s just the tip of the iceberg. Some seemingly harmless actions, such as closing unused credit cards, could also have unexpected effects on your credit score. Here are four surprising things that could hurt your chances of getting approved the next time you apply for a loan or credit card.
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1. Close old credit accounts
It might seem like a good idea to cancel a credit card that you no longer use, but it could hurt your credit, especially if it’s a card you’ve owned for a long time. Credit scoring models consider the average age of your credit accounts when determining your score, and a longer history of responsible credit management translates into a higher score. Closing a credit card could reduce the average age of your account and your credit score could take a slight hit.
You also reduce your total available credit when you cancel a credit card. If your expenses stay the same, it means your credit utilization rate will increase. This number is the percentage of your available credit that you use each month. A high credit utilization rate is a red flag to lenders, as it may indicate that you are living beyond your means and that you may be unable to pay back what you borrow. Ideally, you should aim to use 30% or less of your available credit at any given time.
Think carefully before canceling your credit card and understand how this will affect the average age of your account and the rate of credit usage. If your credit card doesn’t have an annual fee, you might be better off holding onto it so you don’t risk the negative impact its cancellation might have on your credit score.
2. Apply for new credit
Applying for new loans or new credit cards can be good or bad credit loans , depending on whether or not you are approved. Whenever you apply for new credit, the lender will do a thorough investigation of your credit report to assess your creditworthiness. This lowers your credit score by a few points. Credit scoring models recognize that it’s okay to shop around when looking for a new loan or credit card, so all inquiries that take place within 30-45 days will generally count as one request. But if you apply for new credit after that time, you’ll end up with another serious investigation of your report and your credit score will drop a few more points.
If you are approved for the loan or the credit card, these small drops in your score should not matter, as you will now have access to more credit, and therefore your credit utilization rate will decrease. It could actually improve your credit score. But if you are denied the credit card or the loan, you will have lowered your credit score for no reason.
You can avoid this by not applying for new credit unless you really need it and are sure you are approved. If your credit is bad right now, take steps to improve it by opening a secure credit card, make your payments on time and limit the use of your credit. Then when your score improves, you can apply for best credit cards and ready.
3. Errors in your credit report
Mistakes aren’t the only thing that can ruin your credit. If someone steals your identity and uses it to open fake accounts in your name, you could pay the price for their actions. Everyone is entitled to one free credit report from each credit bureau per year thanks to AnnualCreditReport.com. Check yours and look for any accounts you don’t recognize or anything that looks incorrect. Even if you are not a victim of identity theft, it is possible that a financial institution made a mistake or confused you with someone else with a similar name when reporting to the offices of credit.
If you notice anything that doesn’t seem out of place, let the credit bureau and the financial institution with which the account is linked. Consider placing a fraud alert on your account if you believe you’ve been the victim of identity theft. This will tell lenders to take extra steps to verify your identity before opening new credit accounts in your name.
4. Unpaid parking tickets and overdue library books
You might not think that a late parking ticket or library book could cause you a lot of trouble, but if you rack up a bunch of late fees and don’t pay, it’s possible the city or the library sends you to collections. This shows up on your credit report, and it stays there for seven years from the date of the original default. This could make lenders reluctant to give you money.
You can avoid this by monitoring all your bills and paying them promptly. If you know a payment will be late, contact the person or company you owe and explain your situation. If this is your first time paying late, you may be able to persuade them not to refer to collections or to report the late payment on your credit report.
A high credit score is essential to getting new loans and lines of credit, but if you make any of the four mistakes listed above, you could inadvertently lower your score. Take action to correct this now by checking the accuracy of your credit reports, paying overdue bills, and limiting how often you request or close your credit accounts.