While late and unpaid balances on credit accounts are one of the ways that a person can lower their credit score, there are other less obvious ways that a credit rating can be harmed. Keeping a high balance, leaving smaller debt unpaid, opening multiple lines of credit, and consolidating debt can all impact a consumer’s credit standing.
Carrying High Balances on Credit Cards
While it might be tempting to fill up a line of credit on a store charge account, especially if interest and payments are deferred for a length of time, this move can actually harm a person’s credit score. Even if payments are made in a timely manner, the problem is with what is known as the credit-utilization ratio. The credit-utilization ratio takes a consumer’s total credit limit and compares that with what is in use, comparing the amount of debt that a person has in relation to his or her available credit. When only a small amount of credit remains, this could lower an individual’s credit rating.
Allowing Unpaid Bills to go to Collections
Most people are aware that unpaid credit cards will negatively impact credit, but so may unpaid debt or bills that may seem smaller in nature. Unpaid traffic tickets, library fines, rent, medical bills, and other types of debt may not affect an individual right away, but if these bills are sent to a collection agency, the individual’s credit score can be negatively impacted.
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Applying for Several Loans or Credit Cards
Having a lot of available credit can be good for a consumer’s credit rating, especially if many lines of credit have been held onto for many years. One way to improve a bad credit rating is to open new lines of credit to establish a good record of payment. However, if too many lines of credit are opened over a short period of time, instead of helping to boost the credit numbers, this can actually cause the numbers to drop. Every time a line of credit is initiated, the creditor must pull the consumer’s credit report. Too many pulls in a short time period is a red flag and can lower an individual’s credit rating.
Closing Accounts that are in Good Standing
Consolidating debt may seem like a great way to reduce debt and thus to increase a person’s credit standing, but this move can actually harm a consumer’s rating. When multiple credit accounts are consolidated into one account, this does help to lower overall interest and make it easier to pay down debt. However, if the old credit accounts are then closed, this lowers a consumer’s total line of credit, which is now full from the consolidation. This leaves little to no available credit for the individual, causing a lower credit score. While it can be good to consolidate accounts, it is more beneficial to the consumer to leave at least some of the old credit accounts open and maintain a zero balance in order for the individual to have a better credit-utilization ratio.