Beware: These moves can leave a dent in your credit score
- These common moves can cause your credit score to drop.
- They include closing a line of credit, paying an old debt and failing to regularly check your credit report.
Ted Rossman, an industry analyst at CreditCards.com, recently booked a trip to Walt Disney World with his wife, Chelsea and 3-year-old daughter, Ashleigh.
He charged the $3,000 vacation on a new credit card. Shortly after, he was shocked to find his credit score had dropped to 790 from 831. "Still good, but a far cry from 831," Rossman said. (Scores from FICO, the data analytics firm that develops and sells credit scores, range from 300 to 850 — and the higher, the better.)
Although he paid off the $3,000 before he even received a statement, the balance was still reported to the credit bureaus. "The card has a $7,500 credit limit and for a few days I was using more than half of that," he said.
The standard advice for a healthy credit score is to avoid paying your bills late or letting your balances get too high. Yet many other moves can lower your score, experts say.
Paying off an old debt
It seems like you're doing something good: An old, unpaid bill resurfaces and you make a partial payment on it.
However, sometimes these debts are already so old they're not legally enforceable, said Katherine Lucas McKay, who focuses on consumer debt at the Aspen Institute.
Once the debt collector makes a record of your active payments, it's legal in many states for the debt to be treated as new, Lucas McKay said.
Often the easiest thing to do, she said, is to pay off the balance completely. "Your score will start to rise again once that record is closed," she said.
If you believe the collection agency is acting inappropriately, file a public complaint through the Bureau of Consumer Financial Protection. For the debt collectors, she said, it's often easier to just resolve the issue "rather than have their regulator look into the situation."
Closing a line of credit
After you've paid off a credit card, you might close the line of credit.
Keep in mind that doing so will lower your overall credit limit, and therefore may increase your utilization rate — how much credit you're using versus what's available to you.
"There is some data from FICO that reveals people with credit scores above 800 commonly maintain a credit ratio below 10 percent," said Bruce McClary, vice president of communications at the National Foundation of Credit Counseling.
To offset the smaller credit limit, you should have a strategy for paying down the remaining balances as quickly as possible and bringing the utilization ratio back within an acceptable range, McClary said.
Sticking with one type of credit
Ten percent of your score is about the variety of your debt, said Matt Schulz, credit expert at CompareCards.com.
"If you've had a car loan, a personal loan, a credit card and a mortgage and handled them all well, you're probably going to have a higher score than someone who has just had a credit card — all other things being equal," Schulz said.
That's because lenders have more data points to pull from to make their decisions.
You shouldn't go out and get a loan you don't want or need just to bump your score a bit, he said, but, "it is worth considering in some circumstances."
Failing to check your credit report
Errors on your credit report can drag down your score, Schulz said. "It's absolutely essential to review your credit report at least once a year to make sure that it is accurate," he said.
If you see a potential problem — be it a reporting issue or sign of identity theft or fraud, let the credit reporting company know as soon as possible. "The resolution process probably won't be fast or simple," Schulz warned. "But it's all worth it.
"You should never let someone else's mistake damage your finances."
The three big firms that generate credit reports for consumers are Experian, Equifax and TransUnion. You are allowed one free report from each of the three companies each year, according to the Federal Trade Commission.
You can also freeze your credit with these agencies for free to protect yourself from identity theft and other types of fraud.
Timing ...
Although Rossman said he couldn't have avoided the drop to his credit, he said the experience serves as a good reminder that people in the market for a loan — particularly a mortgage — shouldn't apply for new credit cards or even make a big purchase until after closing, he said.
His score is already back up to 815.
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