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20-03-2025

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The Habits That Lower Your Credit Score: A Comprehensive Guide

Maintaining a healthy credit score is crucial for financial well-being. A good credit score opens doors to favorable interest rates on loans, better insurance premiums, and even apartment rentals. Conversely, a low credit score can significantly restrict your financial options, leading to higher interest rates, limited borrowing power, and even employment difficulties. Understanding which habits negatively impact your credit score is the first step towards building and maintaining strong credit. This article explores the key habits that can lower your credit score, drawing on principles often taught in Everfi-style financial literacy programs.

1. Missing Loan Payments (or Paying Late):

This is arguably the most significant factor affecting your credit score. Every missed or late payment is reported to the credit bureaus (Equifax, Experian, and TransUnion). These bureaus track your payment history, which accounts for a substantial portion (typically 35%) of your credit score calculation. Even a single late payment can negatively impact your score, and repeated late payments will significantly lower it. The severity of the impact depends on the type of account (credit cards, loans, mortgages) and the length of the delinquency. A 30-day late payment is less damaging than a 90-day or longer delinquency, which can severely impact your creditworthiness and potentially lead to account closure.

Strategies for Prevention:

• Set up automatic payments: Automate your loan payments to ensure on-time payments every month.
• Use a planner or calendar: Mark payment due dates on a calendar or use a budgeting app to remind yourself.
• Set up payment alerts: Many banks and lenders offer email or text alerts notifying you of upcoming payments.
• Budget carefully: Create a realistic budget that accounts for all your expenses, including loan payments.
• Communicate with creditors: If you anticipate difficulty making a payment, contact your creditor immediately. They may be willing to work with you to create a payment plan or offer other options.

2. High Credit Utilization:

Credit utilization refers to the percentage of your available credit that you're using. For example, if you have a credit card with a $1000 limit and you owe $800, your credit utilization is 80%. High credit utilization (generally above 30%) is a significant negative factor in credit scoring. Lenders view high utilization as a sign of potential financial strain, making you appear riskier.

Strategies for Prevention:

• Keep credit utilization low: Aim to keep your credit utilization below 30%, ideally below 10%.
• Pay down balances regularly: Make extra payments whenever possible to reduce your balances.
• Increase credit limits: If you have a good payment history, you can request a credit limit increase from your credit card issuer. This will lower your utilization rate even if your balances remain the same.
• Avoid opening multiple credit cards simultaneously: Opening several new cards in a short period can negatively impact your credit score, even if you manage them well.

3. Applying for Too Much Credit in a Short Period:

Each time you apply for a new credit account (credit card, loan, etc.), the lender performs a hard inquiry on your credit report. Multiple hard inquiries in a short time frame can signal risky behavior to lenders and lower your credit score. While one or two inquiries won't significantly hurt your score, numerous inquiries within a short period will.

Strategies for Prevention:

• Limit credit applications: Only apply for credit when you genuinely need it.
• Shop around strategically: If you're shopping for a loan or credit card, try to complete your applications within a short timeframe (typically 14-45 days), as many credit scoring models group these inquiries together.

4. Having a Short Credit History:

Credit scoring models consider the length of your credit history. A shorter history makes it difficult for lenders to assess your creditworthiness accurately, leading to a lower score. This is particularly relevant for younger individuals just starting to build their credit.

Strategies for Improvement:

• Become an authorized user: Ask a trusted family member or friend with a good credit history to add you as an authorized user on their credit card. Their positive payment history will be reflected on your credit report.
• Use a secured credit card: A secured credit card requires a security deposit, which acts as your credit limit. Responsible use of a secured card can help build your credit history.
• Pay all bills on time: Establish a history of on-time payments on all your accounts, even small ones.

5. Ignoring Errors on Your Credit Report:

Errors on your credit report can significantly impact your credit score. It's essential to review your credit report regularly (you're entitled to a free report from each bureau annually) and dispute any inaccuracies. These errors can range from incorrect account information to accounts that don't belong to you.

Strategies for Prevention:

• Check your credit report regularly: Review your credit reports from all three bureaus at least annually to identify and correct any errors.
• Dispute errors promptly: If you find errors, follow the dispute process outlined by the credit bureau to have them corrected.

6. Account Collections and Bankruptcies:

Account collections (unpaid debts turned over to collection agencies) and bankruptcies have a significant and long-lasting negative impact on your credit score. These events demonstrate a history of significant financial difficulty and severely damage your creditworthiness.

Strategies for Prevention:

• Manage debt responsibly: Avoid accumulating excessive debt that you can't manage.
• Seek professional help: If you're struggling with debt, consider seeking help from a credit counselor or financial advisor.

7. Closing Old Accounts:

While it might seem logical to close old accounts you don't use, doing so can actually harm your credit score. The length of your credit history is a key factor, and closing old accounts shortens this history, potentially lowering your score. Moreover, closing accounts reduces your available credit, potentially increasing your credit utilization ratio if you're still using other accounts.

Strategies for Maintaining Old Accounts:

• Keep low-limit, old accounts open even if you don't use them. The age of the account positively impacts your score.

Building and maintaining a healthy credit score is a marathon, not a sprint. By understanding these habits and proactively implementing strategies to avoid them, you can significantly improve your financial health and unlock numerous opportunities. Remember that consistency and responsible financial management are key to achieving long-term credit success. Regularly monitoring your credit report and addressing any issues promptly are vital components of maintaining good credit.