Most of us know that major financial faux pas like filing for bankruptcy or defaulting on a loan are a surefire way to tank your credit score. But did you know that there are many less obvious, everyday things that can lower your score, too? Seemingly small things like turning in library books late or forgetting to make your monthly payment on that gym membership you never use.
1. Unpaid Parking Tickets
We’ve all been there. You come out of a meeting only to see a parking ticket adorning your windshield. You have good intentions of paying, toss it in the glove compartment with your bundle of napkins and papers, and…totally forget about it.
Unfortunately, the government doesn’t forget! In fact, many jurisdictions, including Washington, D.C., turn over unpaid parking tickets to collections agencies. Having an account in collections can greatly damage your credit score. Better to pay the ticket than risk your credit score taking a hit.
2. Renting a Car with Your Debit Card
Many car rental agencies will let you use your debit card to pay your deposit. However, they also typically state in the rental contract (in the fine print that no one reads) that they can pull your credit report if you choose to pay with a debit card.
Here’s the problem: that credit check causes a “hard inquiry” on your credit report—which is when a lender, creditor or financial institution requests a credit check before deciding whether or not to extend a line of credit to you. Each hard inquiry drops your credit score by a few points and will remain on your credit report for two years. If you’re renting a car, it’s best to use a credit card instead.
3. Not Using, Paying Off or Closing Out a Credit Card
It seems counterintuitive: getting rid of credit card debt and closing out the card once it’s paid off should increase your credit score since it shows good debt management, right? Unfortunately, in the world of credit scores, this is not usually the case.
If you have a credit card that shows no activity for a long period of time, the credit card issuer may close your account. This decreases the length of your credit history and increases your overall credit utilization rate (how much debt you carry versus your credit limits). The age of your credit accounts comprises about 15% of your credit score—so it’s best to keep credit accounts open, especially the ones you’ve had the longest.
To keep your credit cards active, after you’ve paid down the balance, be sure to charge a small amount to your card each month. Even the occasional candy bar or Starbucks coffee can keep your account open.
4. Forgetting About an Old Gym Membership
You bought a gym membership back in the day and had your monthly payments automatically charged to your credit card. Since then, you’ve hung up your sneakers— and lost your credit card so you had to get a new one. But you never thought to update the information on your automatic payments.
That unpaid gym membership could end up in collections, so it’s important to cancel any memberships you’re no longer using—or if you wish to keep them—be sure to update your credit card information as needed so you stay current on your payments.
5. Overdue Library Books
It’s hard to imagine that not turning in that latest Nicholas Sparks novel or Star Wars VHS to the library on time could lower your credit score. But many libraries—already dealing with loss of revenue from budget cuts—are cracking down on so-called “deadbeat” borrowers and sending overdue accounts to collection agencies. Often it’s simply an oversight, but be sure you (and your kids) turn in books and videos on time to avoid dings to your credit score.
6. Getting a New Cell Phone
You probably know that applying for a new credit card or auto loan count as hard credit inquiries. But lenders aren’t the only ones who routinely pull your credit when trying to decide whether to do business with you.
Opening a new cell phone account, getting cable TV service, applying for car or life insurance, renting an apartment, opening a new bank account, setting up utilities at your new address—all of these can result in hard credit inquiries. Too many inquiries in a short period of time can lower your score and make you look risky to lenders.
Some of these inquiries can’t be avoided, but it’s best to make sure there aren’t too many inquiries too close together.
7. Settling Old Debts
Paying old debts or settling debts with a creditor helps your financial situation, but could hurt your credit score. When you pay an old debt, it could reappear on your credit report, and will also show as a “new” entry, meaning it will stay on your report longer.
Similarly, when you settle a debt with a creditor for less than you owe (i.e., through a third-party debt settlement service), you save money but it hurts your credit score. Your report will show that you paid less than you owed, and that’s a no-no in credit score world.
8. Paying Off Your Ride
Again, it seems strange that paying off debt could hurt your credit, but credit scores are a complex beast. There are two major types of loans—revolving loans, like a credit card, and installment loans, like a mortgage or car loan. Credit scoring models are designed to take into account both. If your auto loan is the only installment loan you have, paying it off could actually decrease your credit score.
The Bottom Line
Sometimes it makes sense to let your credit score take a small hit to improve your overall financial situation or save money. But it’s important to be aware of all of the factors impacting your score—no matter how seemingly small—and to weigh the long-term pros and cons.
It’s also good practice to check your credit report annually for errors and new inquiries, or any entries you don’t recognize. You can check your credit report from each of the three reporting credit bureaus—Experian, Equifax, and TransUnion—once a year for free. Go to AnnualCreditReport.com to get started.
Resources: Credit.com; Experian, TheNest.com; Learnvest.com.