A man is unpleasantly surprised by his credit score

6 things that lower your credit score

The most dangerous thing about credit scores is the unknown; factors that may be totally unapparent to the average person but end up playing an enormous role in how that all-important score is calculated. A lot of people waltz on into adulthood without ever taking the time to fully inform themselves on how to properly protect their credit score.

Sure, some of it is common sense. If you've been ultra-careful with your payment and borrowing habits then there's a good chance your score will be in perfect shape. But there still might be little things you're missing that'll harm you. Either way, it never hurts to know a little bit more about something that's so pertinent to your financial maneuverability.

A good way to start with that is to learn how your credit score is calculated. In Canada, this is the basic breakdown:

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Types of credit used (10%)

Each of the sections below will elaborate on these categories and tell you how to avoid harming your standing within them.

1) High balances

Allow me to analogize for a moment here. Imagine there are two drivers. The first pays careful attention to her fuel levels and always makes sure she has a plan for filling up once the tank dips below 25% capacity. The second is a little more relaxed about his fuel situation. Refills won't start showing up on his radar until the tank is at least under 10%. He's never actually been in an emergency but he's had a couple of close calls.

Now who would you rather get in a car with?

Unless you enjoy 'living on the edge' in irrational ways, then you almost certainly chose the first option. Credit score calculators think the same way. Just because you have a maximum amount of credit doesn't mean you should be pushing that limit. Moreover, debt to credit ratio is something that's taken very seriously by credit score calculators and factors in heavily to the evaluation. There's no point in unnecessarily running it up out of laziness.

Without a buffer zone it's easy to slip up and get yourself into financial trouble. As a good rule of thumb, you should always do your absolute best to have used up no more than 75% of available credit on any given account, and to stay as close to zero as you can afford.

2) Late payments

Consider this a step up from having high balances—and not in a good way. Late payments are extremely common among credit card users and making a habit of them is a fantastic way to watch your credit score spiral out of control.

One late payment won't be the end of the world though. There's even a chance that credit score calculators will disregard anything that's under 30 days late. However, once you get into the 30-90 day range, that'll definitely work against you.

The situation you REALLY want to avoid is delinquency. This is generally considered to be any payment failure that goes beyond 90 days. Delinquency has serious penalties and could cause your score to immediately drop by triple digits.

Even if you're not capable of making a payment in full when it's due, you should at least try and provide the minimum payment. That will always buy you some more time and lessen the blow of whatever penalty may come into effect.

3) Charge-offs

If we had to nickname this benchmark on the unpaid debt scale, then "crisis mode" might be an appropriate moniker for it. Because a charge-off can only mean that things have gotten pretty dire.

Essentially, a charge-off occurs when a lender declares that a borrower is unlikely to pay of his or her debt. What typically happens from there is that the debt will be transferred to a collection agency that can keep tabs on the borrower and take back the debt once the necessary funds become available. A charge-off is a major red flag on a credit report and will be accordingly damaging on a credit score.

4) Liens

Not everyone will be familiar with this term but it's an important one when it comes to debt. A lien is more or less a legal assertion that gets made on your property by a party that is owed an outstanding debt. It means that you no longer have total possession of the property until the debt is paid off. Think of it as a type of agreement that accompanies collateral.

Liens are terrible in their own right but their impact on a credit score makes them even worse overall. Even a lien that is paid off will stay on your credit report and detract from your score for years to come. Avoid having one at all costs.

5) Closing cards

Conceptually it sort of makes sense that you wouldn't want to have very many active credit cards. The more of them you have, the more likely it is that they'll get you into trouble, right?

Well, perhaps, but the benefit of having active credit cards is that they can improve your debt to credit ratio. Maintaining a healthy stable of cards will work wonders on the "Amounts owed" and "Types of credit" sections of your score's rubric.

Closing a card also impacts your "Length of credit history." You want to demonstrate to these credit bureaus that you've been responsible over a long period of time. Even closing an account just to hide bad history could end up hurting you more than it helps you.

6) Request bombardment

Just because it's good to have a healthy number of credit channels available doesn't mean that it's a smart idea to try and enable them all at once. Excessive amounts of inquiries are arguably the most common credit mistake that people don't realize are a mistake.

Regardless of intentions, a credit bureau will not look kindly upon a flurry of recent credit inquiries and applications. Generally they're a sign that someone needs money in a hurry and probably isn't all that stable financially.