Money Decisions That Can Hurt Your Credit Score
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
Your credit score is one of the most important factors in your overall financial success. A high credit score tells lenders you're a responsible borrower and that they'll get their money back. This can help you get approved for loans and credit cards. On the other hand, a low credit score can impact your ability to get loans or take out a credit card, making it much harder for you to manage your expenses or build wealth for the future.
Here are a few examples of financial decisions that can negatively impact your credit score:
Jump To
Money decisions that can hurt your credit score
Missing a payment
This is the worst thing you can do to your credit score! Depending on your debt type, missed payments can lower your score by 60 to 110 points. If you can't afford to pay your credit card bill on time, reach out to your creditor immediately to explain your situation and see if you can work out an alternative payment plan. Ignoring the problem will only make things worse.
Relieve $25k+ in Credit Card Debt or Personal Loan Debt With TurboDebt
- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
Applying for too many credit cards
If you have trouble managing your credit, applying for additional cards may increase your debt levels and lower your credit score. In fact, some lenders may refuse your application if you have already maxed out your cards. Before applying for another credit card, sit down and determine the root cause of your financial problems to make a realistic plan for dealing with them. This will help you avoid unnecessary expenses and limit the damage multiple credit cards can do to your credit score.
Opening too many new accounts
Applying for new credit accounts can actually hurt your score in the short term. This is because credit bureaus like Equifax, FICO, Experian, and Transunion view this behavior as a sign that you are desperate for money and may be unable to meet your financial obligations in the future. Opening too many new accounts also lowers the average age of your credit accounts. However, it can help you in the long run. If you open several new accounts and use them responsibly, you can increase your credit score over time. Just be sure not to apply for too many new accounts at once because that could backfire and hurt your score.
Paying off debt too quickly
Making several small payments to the same creditor over a short period of time can harm your credit score because it indicates that you may be in financial trouble. This can also affect your credit report because it can increase the number of inquiries and lead to duplicate listings. It may also delay the amount of time it takes to pay off your debt and reduce your overall savings. Instead of paying off all of your debt quickly, you should develop a plan that will allow you to pay off your bills gradually and avoid taking out new loans in the meantime. This will keep your debt levels in check and help you maintain a healthy credit score over the long term.
Related: How to Stick to a Debt Payoff Plan
Using a credit card to pay for everyday expenses
I wish I had known this early in my life: Use your credit card like a debit card. Using a credit card to make purchases may seem like a convenient way to pay your bills, but it can land you in serious financial trouble if you tend to carry a balance from month to month. It can also increase your debt load and decrease the amount of available credit you have available to you. This will make it harder for you to qualify for a loan or a new credit card when you need it most.
Instead, you should use your card for major purchases such as vacations or furniture and use the cash-back offers provided with your card for everyday expenses like gas or groceries. This will help you avoid using your card too often and will help you manage your debt more effectively over time.
Making late payments
Your payment history makes up 35% of your credit score, and making late payments can have serious consequences for your credit history. Late payments can make it difficult for you to get approved for other loans, and they can make it difficult to get approval for a job when you need a good credit score to secure it. If you struggle to keep up with your payment deadlines, you should consider setting up a payment plan with your lender, which will allow you to make your payments more manageable. This will allow you to keep your accounts in good standing and improve your overall credit rating over time.
High credit utilization ratio
The calculation of the credit utilization ratio is fairly simple - it is merely the total amount of outstanding debt divided by the available total credit on a particular account. In general, you should aim to keep your ratio below 30%. The nearer you remain to your credit limit, the more effect it will have on your credit score.
Closing a credit card account
It may be tempting to close a credit card account that's been paid in full; however, future lenders may see this as a sign of financial mismanagement and decline your application. Not only does it affect your debt-to-credit utilization ratio, it also shortens the length of your credit history and thus may affect your credit score.
Stopping credit-related activities
This can hurt your credit score and make it difficult for you to obtain approval for new loans or a line of credit
in the future. To avoid this problem, you should use your credit accounts regularly to avoid having your credit information "going stale" on your credit report.
Filing for a bankruptcy
Bankruptcies have a devastating effect on your credit score. A Chapter 7 filing falls off your credit report after 10 years, while a Chapter 13 filing will stay there for seven years. Bankruptcies make some of your unsecured debts disappear, like installment loans and credit card debt. In some cases, the cosigner is also protected, and you can avoid foreclosures. While student loans can be discharged, you'll have to jump through extra hoops. But bankruptcies should be saved as a last-resort option due to their long-term repercussions.
Not checking your credit report
This isn't a money mistake, yet ignoring your credit report can negatively affect you as errors on your credit report or even identity theft can have credit bureaus lowering your score without it being your fault. Free credit report services like AnnualCreditReport.com let you check your credit reports so you can identify a mistake immediately and begin to fix an issue.
Relieve $25k+ in Credit Card Debt or Personal Loan Debt With TurboDebt
- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
Win-win debt repayment strategies
- Debt consolidation loans: A debt consolidation loan is a good way to pay off your existing debts and regain control of your finances. It can also help lower your monthly payments and get you out of debt faster. Many companies offer consolidation loans, including banks and credit unions. Once you receive your loan funds, you'll pay off your other debts with the money from the loan.
- Balance transfer cards: If you have existing credit card debts with high interest rates, a balance transfer card may help you reduce your interest payments. This can allow you to pay down your debt faster and save money on interest charges over time. Some balance transfer cards offer an introductory 0% APR that can save you money if you plan to repay the balance before the introductory period ends.
- Debt refinancing: If you've already paid off a portion of your loans and want to lower your payment amount or eliminate your interest rate, you may consider refinancing your loans with another lender.
- Debt settlement: If your outstanding balances are too high to repay in full, you may want to consider negotiating a settlement with your lender. This may allow you to lower the amount you need to pay or settle the account completely for a lower amount.
- Debt management plans: A debt management plan can help you manage your payments on your unsecured debts. A debt management service or a debt relief company will typically contact your creditors on your behalf and work with them to devise a payment schedule that you can afford.
The bottom line
Keeping your credit score high is like walking on a tight report. The scoring model considers your payment history, the length of credit history, amounts owed, and new credit in determining your score. And depending on the types of credit you apply for, a hard inquiry may temporarily cause your score to dip. If you have an affinity for making minimum payments on your debts, your score won't be affected, but you'll remain in debt for a long time.
By keeping a close eye on your credit limit
and limiting the number of open accounts, you can help maintain a good credit score and avoid problems with your future loan applications. However, closing an account with a zero balance could negatively affect your credit score. Be sure to keep your account open in case you need to make a large purchase in the near future. By maintaining a healthy credit profile and keeping your credit card balances low, you can avoid problems and keep your credit score high. If you carry a high balance on any of your credit cards, you should try to pay it off as soon as possible to improve your score.
Relieve $25k+ in Credit Card Debt or Personal Loan Debt With TurboDebt
- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
Share this article
