You feel you do a good job of building your credit score, but sometimes, it seems like your hard work hamstrings you. Besides requesting a free credit report to check for discrepancies, another way to protect your credit score is to understand what drives it down. Here are surprising things that make your score drop.
Opening a New Account With the Same Lender
Say you want to refinance a loan with your current lender to enjoy a reduced interest rate. Your lender approves your request, but you notice your score drops. What may have happened is your lender ran a hard credit inquiry, which dings your score a few points.
Usually, the only time something like this happens is if you initiate a change rather than your lender. Lenders may view refinancing an existing loan as opening a brand-new account, which calls for a credit pull, which depletes your score. On the other hand, if you have a store credit card and the company switches credit providers, lenders initiate such changes, which means you do not have to worry about your score. The same applies if you lose your credit card or if someone steals it and you need a new account number.
Closing an Old Account
You may have old credit accounts you’ve paid off and do not use anymore. If you close those accounts, it affects your credit utilization rate, which credit card companies use to compute 30% of your score. Your unused account’s credit limit affects your debt-to-credit limit ratio. If you shut down an old account, you boost your debt in relation to current available credit, which chisels away at your score.
Besides your credit limit, how long you’ve had a specific credit account also affects your score. Credit history comprises 15% of your score, so by closing an old account, you reduce your credit history and score in a single swoop. That said, you won’t see an immediate dip in your score, as it takes from seven to 10 years for a closed account to drop off your report and reflect on your score.
Tripping Up When You Have a High Score
If you already have a solid score, you may feel devastated to discover a significant drop. Maybe life got busy and you forgot to make a payment. If that happens, your score may suffer more damage than a person with an average score who makes the same mistake.
Blending Personal Credit With Business Credit
If you own a business, it’s a good idea to divide your personal credit from your business credit. Personal credit accounts link to your FICO score while business credit links to a Paydex score. The way blurring personal credit and business credit harm your personal score is if you use a personal guarantee to open a business account and do not keep up with the payments. By defaulting on the business account, you put your personal assets and personal credit at risk.
Depending on your bank or the credit card provider, card issuers may report your business credit activity to credit bureaus. Depending on how you handle your business credit, this may either help or hinder your score.
Partially Paying Old Debt
After requesting a free credit score or report, you may discover you have an old debt. Think twice before reaching out to the lender to clear the debt, as you do not want to risk legal action or dinging your score. If you only pay a percentage of the old debt, that resets the timeframe for the statute of limitations, a period in which the company may sue you for unpaid debt. Judgments against you harm your score, so you’re likely better off paying the debt in full rather than in partial payments.
Educate yourself on factors great and small that affect your credit score. Proper knowledge helps pave the road to financial peace of mind.