Editorial Policy

4 things that are sure to drop that great credit score

Miranda Marquit

November 25, 2014

Reputation is all we really have, some say. But reputation isn't just what your acquaintances say about you anymore.

In this post-industrial era, part of your reputation is collected, categorized and shared. That part of your reputation even has a rank — and it's your credit score.

With just one or two serious missteps, that great credit score can drop fast, potentially costing you more money down the road. Here are four things sure to drop your great score, and what to do about them:

1. Maxing out your credit limit

Jonathan Roisman, who covers credit scores for NextAdvisor, points out that credit utilization, or how much of your available balances you use, accounts for about 30 percent of your FICO credit score, the dominant scoring model. If you have high credit utilization, your score could drop.

Roisman suggests that you keep your credit utilization to no more than 30 percent of your available credit. So, if you have a total limit of $10,000, try not to carry a balance of more than $3,000.

This means that spending to rack up rewards points could actually impact your credit score. If you regularly spend 70 percent of your available credit each month on everyday purchases, it could drag on your score, depending on when your creditors report your balance. Even if you pay off your full balance each month, if your credit card issuer is reporting the balance before you've made your payment, it looks like you're using a lot of your credit.

One solution is to pay in full twice a month. There is no penalty, and you have the added advantage of not paying interest.

2. Applying for a department store credit card

“Applying for a new credit card in a department store to save a few bucks at checkout results in a hard inquiry,” says Stephen Lesavich, an attorney and the author of “The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards.”

He points out that a hard inquiry, or hard pull, can bring down your credit score, since it indicates that you are looking for new credit. “That increases the financial risk associated with extending additional credit or lending money to that person,” says Lesavich.

There are other surprising times when a hard inquiry on your credit can be made. Lesavich says that some cellphone service providers and utility providers perform a hard credit check before approving you for service. So, even though you aren't applying for credit in these cases, you could still wind up with a lower score.

A hard inquiry isn't going to destroy your credit score, but a flurry of them in over several months could begin to bring it down a little bit. “If you are planning to apply for a mortgage or a loan on a large purchase, like a car, in the next one to two years, you should try to limit any activities that result in multiple hard inquiries,” says Lesavich. Hard inquiries stay on your credit report for two years, but as time passes between inquiries, your credit score should recover.

3. Closing a credit card

Another activity that can impact your credit utilization is closing an account. While it might seem like a responsible move on your part to close a credit card, the reality is that it could damage your credit score, especially if you are in the midst of a debt reduction plan. Let's say you have three credit cards:

  1. Card A: $5,000 limit, $0 balance.
  2. Card B: $3,500 limit, $1,500 balance.
  3. Card C: $4,000 limit, $3,000 balance.

You've just paid off Card A, so it's tempting to close the account. However, with the current situation, you have a total credit limit of $12,500. You are only using $4,500, so your credit utilization is at 36 percent. If you close Card A, though, your credit utilization jumps to 60 percent, since your total credit limit is now $7,500.

Hang on to Card A at least until you pay off the other two. Then, if you feel it's to your advantage to close one account, and you can pay in full and on time every month on any remaining open card account, go ahead and close the card you don't want (perhaps the one with the highest APR or annual fee).

4. Forgotten payments

The biggest factor influencing your FICO credit score is payment history: It makes up 35 percent of your score. However, just making sure you pay your credit card bill on time isn't enough. There are times when other, unpaid billscan impact your score.

Many libraries around the country turn unpaid fines over to collection agencies. This is also true of organizations that issue parking tickets. If you move, and you forget to leave a final address for your final utility bill, that could be turned over to a collection agency as well. Once an account goes to collections, it can damage your credit score.

Even canceling your gym membership improperly can have an impact. If you don't fill out the appropriate paperwork, and instead just cancel your automatic payment, the gym may see that as nonpayment — and grounds to turn your account over to collections.

It can take years to build a solid financial reputation, but all that effort can be destroyed in a few months if you aren't careful. Check your credit reports regularly at AnnualCreditReport.com, and make sure that you avoid making moves that will drop your score.