Paying your bills on time is a great idea, stipulated! Now that we’ve gotten that out of the way, paying your bills on time is not the only thing you need to do to earn great credit scores.
Credit scoring is considerably more complex than that. In fact, roughly two-thirds of the points in your credit scores have nothing to do with paying your bills in a timely manner.
There are, in fact, several ways to hurt your credit scores while never missing a payment.
Running Up Large Credit Card Balances
Roughly 30% of the points in both your VantageScore and FICO credit scores are based on your debt load. And, a large portion of that 30% is specific to how you use credit cards and the size of your balances compared to your credit limits, more formally called your revolving utilization ratio.
Revolving utilization is the relationship between your credit card limits and the credit card balances that appear on your credit reports. If you have $10,000 in available credit and you carry a $5,000 balance, your utilization ratio is a rather high 50%. When those balances climb, your revolving utilization ratios increase.
And as your revolving utilization ratio climbs, the impact on your credit scores will be more pronounced. As a result, if you’re in the habit of revolving large balances on your credit cards each month, you could be hurting your credit scores without realizing it, even if you never make any late payments on those accounts.
Paying Credit Cards at the Wrong Time of the Month
Do you make it a point to pay off your credit card balances in full each month? If so, kudos to you. You’re managing your cards well and saving money in interest fees at the same time.
However, just because your credit cards are paid in full each month does not mean your revolving utilization ratios, as described above, will reach 0%.
Credit card issuers typically only update your credit report once a month. An account update generally occurs shortly after your statement closing date, which is the end of your monthly billing cycle. Paying your balance to $0 by the due date generally ensures that you don’t have to pay interest on your purchases. However, it usually will not result in a $0 account balance on your credit reports.
If you want your credit reports to show a $0 balance — and you should — pay off your balance in full before the statement closing date. That way you avoid ever receiving a statement with a balance greater than zero, which is the same balance reported to the credit bureaus.
Closing Unused Credit Cards
Closing unused credit card accounts is not a good idea. It’s yet another move that often unexpectedly causes a credit score decrease — though not for the reason you might think.
You won’t lose credit for the age of the account (a common misconception). But unfortunately, closing an unused credit card with a $0 balance could backfire and trigger an increase in your revolving utilization ratio. Here’s why: When you close an account, the unused credit limit on that card is no longer considered by credit scoring systems.
So if you have four credit cards with a total credit limit of $10,000, and you’ve got a $2,000 balance spread out between two of them, your utilization ratio is a pretty respectable 20%. If you close one of the inactive cards — and say it has a $5,000 credit limit — your utilization ratio suddenly doubles to 40%, which scoring models consider risky.
Applying for Credit Too Often
Credit scoring models pay attention to how often you apply for new credit. When a lender or credit card issuer pulls a copy of your credit reports, a record of the credit check, known as a hard inquiry, is added.
Although not every hard inquiry will automatically lower your credit scores, some hard inquiries do have the potential to do so. Inquiries can lower your scores because they’re predictive of elevated credit risk. To be safe, it’s best to have a policy of only applying for new credit when you really need it.
More by John Ulzheimer:
- Why Are There Multiple Student Loans on My Credit Reports?
- What Your Credit Score Is Trying to Tell You
- About to Buy a House? Put Your Credit on Lockdown
John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.