Your credit score is not just a random number. Rather, it’s calculated based on a number of factors: how well you process your bills on time, how much credit you use at a time, and whether you tend to borrow responsibly. Having a higher credit score could make it easier for you to qualify for a loan or get a lower interest rate on one. But if you do these seemingly innocent gestures, your credit score could end up plunging.
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1. Request too many cards at once
You might be tempted to apply for a new credit card when a generous sign-up bonus opportunity presents itself or when you discover a rewards program that you can benefit from. But be careful: applying for too many new cards in a short period of time could hurt your credit score.
Every time you apply for a new credit card, it counts as a serious investigation of your credit report. A single serious investigation will usually drop your score by around five to 10 points, which isn’t a big deal if your credit is good to begin with. But if you have three inquiries in the same month or two, it could drop your score by almost 30 points, and that’s more damaging.
Another factor that goes into calculating your score is your credit mix, which refers to the different types accounts you have opened. A healthy credit mix will usually be a combination of revolving credit (which credit cards offer you) and installment loans, like a mortgage or car loan. But if you apply for too many new credit cards at once, it could skew your mix in a less healthy direction and damage your score. A better bet is to space out credit card applications – ideally six months or more, but at least 90 days.
2. Close an old credit card
If you have a credit card that you barely use, you can assume that it makes sense to close it. But in reality, it could hurt your credit score.
Another factor that goes into calculating this number is the length of your credit history. If you’re closing a credit card you’ve only opened for a year, the impact on your score should be minimal. But if you close a credit card you’ve held for 10 years, it could hurt your score a lot.
3. Repay a loan
If you’re a diligent saver, you might find yourself in a position where you can pay off a personal loan or car loan sooner than you expect. Or, you could just pay off that loan over time. Now you’d think that would be a good thing – it shows you’ve been keeping your payments on track and on a repayment schedule. But believe it or not, your credit score could take a hit after paying off a loan.
Why is that ? We just talked about the importance of having a healthy credit mix. If you owed money on an auto loan plus three credit cards, and now that auto loan is gone, your only open accounts would be credit cards, which are considered a less healthy type of debt. As such, your credit score could take a hit when your credit mix suddenly seems less favorable, even though paying off a loan is, in fact, a responsible thing to do.
Sometimes your credit score can take a hit without you being responsible, such as paying off a loan on time. But in other cases, you can avoid damaging your credit by spacing out new credit card applications and keeping long-standing accounts open. Either way, it pays to keep reading on the different things that can affect a credit score so that you can keep yours in good shape.