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Many aspects of credit can be confusing and even counterintuitive. Sometimes, it can even feel like you're doing everything right -- paying all your bills on time, not maxing out your cards -- and yet you still have poor credit. That's because there are a number of seemingly benign actions that can seriously hurt your credit score. The trick is making sure you're aware of every strange way you could possibly damage your credit. Here are several weird ways you can hurt your credit.
1. Avoiding Credit
If a consumer has a good job and no debt or credit cards, her credit score should be excellent, right? Unfortunately, no. Great credit scores only come from having and using an appropriate mix of credit products. Consumers who avoid credit products, out of prudence or for any other reason, can end up with a low score or a "thin file" (a credit report that does not have enough data to assign a score).
2. Closing Unused Credit Card Accounts
A huge part of the consumer credit score -- about 30 percent for both the FICO score and the VantageScore -- is based on the amount of credit used in relation to the amount of credit available. This is called the debt utilization ratio. People with healthy credit scores keep their utilization under about 30 percent (they don't charge more than 30 percent of their credit limit) and people with top credit scores keep it under 10 percent. The ratio is calculated for each account and overall. Closing an unused credit card account pushes the utilization up (for consumers who carry a balance).
Here's an example: Joe has three credit cards. Card A has a $2,000 limit and a $1,000 balance (50 percent utilization). Card B has a $1,000 limit and a $300 balance (30 percent utilization). Card C has a $1,000 limit and isn't carrying a balance (0 percent utilization). His overall utilization is 32.5 percent ($1,300 used, $4,000 available). If he shuts down Card C because he never uses it, his overall utilization jumps to 43.3 percent ($1,300 used, $3,000 available), likely resulting in a ding to his credit score.
3. Taking Advantage of Credit Offers
Solicitations, ads and point-of-purchase credit offers pop up every day. But taking advantage of such offers causes a hit to the credit score each time. Ultimately, the cumulative reduction will be significant enough to result in denial of subsequent applications. That's because for every application, the creditor initiates a hard inquiry into the consumer's credit history. Every hard inquiry affects the score in two ways. One, it causes a minor dip to the score, and two, it's a point against the maximum number of inquiries that a creditor allows in order to approve an application.
4. Consolidating Debt to a Low-Interest Card
This "gotcha" goes back to the utilization ratio, which has a big impact on your score. Even when a consumer's other cards have zero balances, if any one credit card is maxed out, the score suffers. A debtor who is tempted to transfer several small, high-interest balances to a single card with more advantageous terms should know that doing so will cause the score to fall until the balance is brought down, even if the high balance is the only revolving debt.
5. Someone Else's Mistakes
One-fifth of Americans have errors on their credit reports. and 5 percent of consumers have errors that are significant enough to bring down the score. People with common names are particularly at risk of having items on their credit report that belong to someone else. Obtain your free credit report every four months from one of the three major credit reporting agencies (do so by visiting AnnualCreditReport.com) and follow the agency's instructions to request correction of all errors, large and small. Success can be difficult to achieve but is worthwhile to pursue. Some persistent consumers have won judgments in court against credit reporting agencies that fail to correct errors in the manner prescribed by federal law.
6. Starting Up a New Utility
Many cable TV, cell phone, landline, gas and electric providers run a credit check prior to starting a new service. Similar to a credit card application, this is a hard inquiry that lowers the credit score.
7. Not Paying a BillUnpaid bills are not "weird" when it comes to what affects your credit score. But an amazing number of people treat certain bills differently without any basis for doing so. An unpaid bill is an unpaid bill, and if the biller can identify the legally responsible party, there's an excellent chance the delinquency will end up in collections and on that person's credit report. Here are a few examples of bills people ignore (but shouldn't):
- Any disputed bill after a decision has been made in the biller's favor: A moral opposition to paying the bill does not relieve the consumer of responsibility to pay. Don't skip payments unless the biller states that doing so during the dispute process won't harm your position or your credit.
- Parking tickets, unpaid toll charges: In most states, these are the responsibility of the vehicle owner unless he can prove someone else was driving.
- Library fines, unpaid equipment rental charges, unpaid storage fees, lapsed gym membership: Any time you are under contract to pay, the unpaid bill could show up on your credit report and hurt your score.
- Rent: Some landlords, particularly those of the corporate variety, report to the credit bureaus.
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