Actions That Can Hurt Credit Scores

In this sometimes frustrating and crazy world of credit, we are always asking what we can do to help our credit score. There are a lot of actions that people take thinking it will help their credit score, when, in fact those actions can have just the opposite effect. Let’s look at a few things that won’t help and could actually hurt a credit score:

1. Paying off all your debt. This is good…right? In reality, not really. When it comes to your credit scores, some debt is actually a good thing! A mix of different kinds of debt is one of the things factored into your credit score. A good credit mix is 10% of your FICO scores. The bureaus scoring models like to see at least one open installment loan (auto/mortgage) and a few credit cards. There needs to always be one credit card that has a small balance on it… even just $10. There should also be two to four other revolving accounts that are open but have no balance.
Understandably there are those that just prefer to pay with cash, but that doesn’t do your credit scores any favors. Everyone should have at least one or two credit cards that they use, and one of those cards should carry a small balance from month to month. You would be surprised at how much it can actually hurt a credit score to not have any revolving balances.

2. Closing old credit cards. To put it simply…don’t do that. When you close credit cards, you are closing out the history, and a long history on a card helps credit scores. Especially a long history with no late payments. That being said, if you have 10-15 cards and just don’t want that many, close those that you’ve had the least amount of time.

3. Marrying someone with good credit or divorcing someone with bad credit. If a person has bad credit, marrying someone with good credit isn’t going to help. Every person has their own credit profile, and it doesn’t merge when you get married. If two people have a joint account together that WILL affect both consumers credit scores, but any account opened solely by one person will only affect that person’s credit.

When it comes to divorce things can get a little tricky as far as joint accounts are concerned. Normally in a divorce decree one person is assigned responsibility for certain debts. Since it is still a joint account, if the person responsible for the account misses a payment or defaults on the loan the person who is no longer technically responsible will also suffer that damage on their credit report as well. When it comes to credit cards and other debt, divorce decrees mean nothing. A divorce decree does not supersede the original agreement between the creditor and the borrower. When it comes to joint accounts and divorce, it is best to close those accounts and open individual ones.

4. Paying off your mortgage. Most people love it when they make that last mortgage payment and own their home free and clear. But because the scoring models like to see at least one installment loan, paying off that mortgage can have a negative impact on a credit score if no other installment loans exist.

5. Having a large income. Credit scores do not take into account how much money a consumer does or does not make. Or for that matter where or even if a person is employed. While having a lot of money is great, it will not help a credit score.

While most consumers are aware of the actions needed to improve a score there are a few “gotchas” that need to be taken into consideration in order to not unintentionally sabotage your credit scores. When it comes to making large purchases, such as a house, before you make any drastic credit moves it’s always best to speak to your loan officer first!