5 Surprising Things That Hurt Your Credit Scores

Credit ScoreWe all know that making late payments or having credit card accounts in collections can hurt your credit scores. But you might be shocked to learn that a lot of other seemingly innocent actions can also negatively impact your credit rating.

Here's a list of five surprising things that can lower your credit scores -- and keep you from having a stellar credit report.Renting a Car With a Debit Card

I learned about this credit-busting issue the hard way: after I rented a car in 2009 from Avis using my debit card.

I thought I was being responsible by using a debit card linked to my checking account. After all, I figured, a debit card would help me avoid unnecessary credit card debt bills and stick to my zero debt lifestyle.

But noooooo. In the fine print of its rental agreements, Avis includes a clause that basically says the company has the right to pull your credit report if you use a debit card as opposed to a credit card. In all fairness, most other car rental companies have contracts with the same clause.

This makes absolutely no sense to me, especially since under the Fair Credit Reporting Act, companies that pull your credit rating are supposed to have a "permissible purpose" – as is the case when you're seeking a loan, credit or employment.

But renting a car doesn't fit into any of these categories. Obviously, car rental businesses see it differently. They want some extra protection for the privilege of "loaning" you a vehicle. If that's the case, instead of pulling credit reports, why don't they simply ask debit card users for upfront deposits, just as they do with those who pay by cash or credit card?

In any event, after I made the mistake of using my debit card to pay for my Avis car rental, the next day I received an email alert from my credit monitoring service. It notified me that there was an "inquiry" on my credit report from Avis and that my FICO credit score had dropped by 14 points. Needless to say, I've never used a debit card at a car rental company since.

Saying Yes to a Department Store Credit Card

When you're spending $50 or $100 at Macy's, Victoria's Secret or wherever you like to shop, I know it can be tempting to say yes to the nice lady behind the counter who offers you a 10% discount – if you just open an instant department store credit card. But believe me, you really should just say no.

Not only do department store cards carry much higher interest rates than do national brand cards, like Visa or MasterCard, but applying for that new store account definitely triggers a "hard inquiry" on your credit report because you're seeking credit.

The end result: You could wind up dinging your credit score.

Estimates are all over the place, but some experts say an inquiry can drop your credit score by 5 or so points, while others say a single inquiry could cost you up to 35 points, depending on your current credit standing. (Read more about how inquiries on your credit report impact your credit score).

Closing a Credit Card With a Zero Balance

For many people who've struggled with debt, when they finally manage to pay off a credit card, their natural tendency is to think "Good riddance." And many of those individuals will close a credit card balance once it's paid off.

But think twice about doing so – or else two quirks of the credit-scoring system could come back to haunt you.

The FICO scoring system operates based on a formula. FICO hasn't revealed all the ingredients in their secret sauce, but they have disclosed some guidelines.

About 30% of your FICO credit score is based on the amount of credit card debt you've charged. The lower the amount of credit card debt you're carrying, the better it is for your credit scores because you'll have a lower "credit utilization rate." For instance, let's say you have just one credit card. It has a $5,000 credit limit, and your balance is $4,000. Your credit utilization rate is 80% because you've charged 80% of your total credit line. Not good. Try to keep your credit utilization rate around 25% or less.

By closing an account, you could throw off your credit utilization rate, inadvertently lowering your credit scores. For example, let's assume you have two credit cards, each with a $5,000 limit. You've charged $1,000 on each card. So your total credit utilization rate is 20% ($2,000 divided by $10,000).

But now you decide to take advantage of a 0% balance transfer offer. So you transfer the full $1,000 balance from one card onto the other card offering you the 0% deal. Then you close the card with no balance. Suddenly, your credit profile has changed – and not for the better.

With just one card boasting a $5,000 limit and a current total balance of $2,000, your credit utilization rate has now jumped to 40% from 20%. Even though you haven't charged a single dime more, you appear "riskier" to the credit scoring system.

Another problem: 15% of your FICO score is determined by the length of your credit history. Older, more established accounts boost your credit rating. So closing an account – especially one you've had for a long time – could be detrimental to your credit health.

A closed account will still be included in your FICO score calculation. But after 10 years, closed accounts are dropped from your credit reports, so you won't get the benefit of that credit longevity when your FICO scores are tabulated down the road.

Buying Furniture From a Local Merchant and Using Their Financing

You might think that debt is debt. But all debt is not created equal – particularly when it comes to your credit scores.

Credit card debt, also known as "revolving debt," is scored less favorably than, say, a home loan. And lower-tier levels of debt, such as furniture store loans, are even further down on the credit totem pole.

So when you buy furniture from a mom-and-pop store, or even a big furniture retailer, and you finance it though that company, it can lower your credit rating because these firms are seen as lenders of last resort. Also, furniture store loans are typically reported to the credit bureaus as "revolving debt." Therefore, if you get a $1,000 credit limit from a furniture store and you proceed to buy a $900 sofa and love seat, you'll appear to be nearly maxed out, which is bad for your credit score.

Remember, too, that FICO's credit scoring system grades the type of loans you have in your credit reports. The "mix" of credit you have accounts for 10% of your FICO scores. So having a healthy mix of credit – for instance a mortgage loan, an auto loan, a student loan and a credit card – is a good thing, as long as you pay all your bills on time. But stay away from furniture loans and household finance companies.

Having a Credit Card Company Not Report Your Credit Limits

All major credit card companies usually report your card balances and payment history to the "Big Three" credit reporting agencies – Equifax, Experian and TransUnion. But in some cases, credit card issuers don't report your credit card limits – or the maximum amount you could charge – to the credit bureaus.

When your credit limits aren't reported, as could be the case for consumers who have no-limit credit cards, your credit scores could suffer. The reason: Without an indication of your credit limit, most credit scoring models – including the FICO score and the VantageScore – don't know how to properly calculate your credit utilization rate.

As I explain in my book, Perfect Credit, navigating the credit-scoring universe isn't always logical, fair or easy. Unfortunately, though, the system is what it is.

So it's up to consumers to know the written and unwritten rules about credit in order to survive and beat the complex, often frustrating, world of credit scores.

Sound off on this topic: Do you think the credit scoring system is fair? Why or why not?

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7 Comments

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jane.m.johnson

No.....I don't think there is anything fair about how they figure your credit score. I had perfect credit and was forced out of my job...leading me right into bankruptcy. I think every case should be heard and looked at instead of generalized that everyone who goes bankrupt is a low life.

March 18 2014 at 4:19 PM Report abuse rate up rate down Reply
Steven

The most surprising credit hit I took was when I applied for mobile deposits on my existing checking account and the bank did a hard credit inquiry. Just don't see any connection to credit, so was very surprised by this.

September 12 2012 at 12:28 PM Report abuse rate up rate down Reply
Dereck

Do yourself a "HUGE FAVOR" and carefully read this:

The 21st Century Act: Final Amendments to Regulation CC Section:
"Prohibits" reimbursement of Credit, Loan, and Finance Balances to a "Bank Entity" leaving only "Nonbank Consumers" able to receive reimbursement, as specified on Pages 85 and 86.

The 21st Century Act states on pg. 85 and 86 that "Only Nonbank Consumers can suffer losses and File for
Re-credit or Re-claim on any Accounts under the Federal Reserve System" also “Any Second or Third Party Presenters utilizing a Banks Documentation, Contracts and/or Agreements to seek Claims shall be considered to be that Bank under the Rules and Regulations”, the Expanded Definitions also includes Credit Cards and Home Equity Lines of Credit.
Also on Pages 100 and 101 "In any Financial Claims the Indemifying Bank (Parent Bank) must be Identified".

(Left-Click to Search Link)
21st Century Act: Final Amendments to Regulation CC http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040726/attachment.pdf

This Federal Law signed January 1, 2006 makes it "Fraudulent" and therefore "Illegal" for the 3 Major Personal Credit Reporting Agencies: Equifax, Experian, and TrasUnion to allow the Banks and the Banks "Third Party Presenters" to place any claim of "Negative" or "Potentially Negative" Accounts on your Personal Credit Based upon the fact that they have no "Legal Grounds or Claim" to the Money.

This is an "Unfair Practice" that diminishes our Financial ability to support ourselves and adversely affects our ability to gain work in many areas which breaks "Antitrust Laws".

These Rules also back claims of: "Aiding and Abetting" Racketeering and Extortion (of Finance Accounts and Personal Credit Reports), Pandering (of Credit and Loan Accounts, and Conspiracy to wit), Theft, Fraud, Federal Mail Fraud, and Telephone Harassment. Also "Threatening of the U.S. Financial Infrastructure", which is a "Capital Crime".

In order to engage the Federal Trade Commission to act against this injustice we must File many Claims, as these Reports must be Filed by a large number of people in order for the Federal Trade Commission to pursue
"Legal Action".

(Left -Click to engage Email Address)

antitrust@ftc.gov

This is way easier than "Occupying Wall Street"!

March 11 2012 at 4:49 PM Report abuse rate up rate down Reply
stewardawlh

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OR
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March 06 2012 at 2:57 PM Report abuse -1 rate up rate down Reply
Sara M

i suffered from the last one - i have a credit limit of $10,000 on my Chase credit card but because the credit limit isnt reported to the 3 agencies, every time they did my quarterly report, they said one of my downsides was that i was overextending my credit. I wasnt but what they were doing was using the highest bill over the last few months, e.g. $3,000 (i travel for my job so use my card for all travel costs) and then if my next bill was $2,400 they were saying $3,000 was my limit and i was using 75% of the capacity which is all wrong. I wrote to all three agencies asking them to adjust the credit limits, provided copies of my credit card statements (i've only 2 cards) and they sent me back a letter you wouldnt even understand what the hell it was about and didnt amend my accounts. What do you do if they can't even get it right when you do write to them. I eventually gave up because their customer service sucked!! My credit scores were all over 780 anyway but it ticked me off that they were inaccurate in their analysis, were advised of it and didnt fix it!

January 30 2012 at 4:58 PM Report abuse rate up rate down Reply
Natasha

Great article,

To get your free credit report you can use sites like: --EliteCreditReport.info--- They offer all 3 in 1 free credit report + credit monitoring.Credit monitoring is used by consumers for one main reason - fraud protection.With so many thefts, credit monitoring is one of the most important thing, because criminals will try to steal your personal information and to use it in any ways.With credit monitoring you are protected.

January 12 2012 at 3:04 AM Report abuse rate up rate down Reply
steele8682

Does anyone else find it strange that the National Foundation for Credit Counseling is funded almost exclusively by fair share donations by sub-prime credit card companies?? These donations are tax deductible, and are not really based on the NFCC's financial literacy merits, so much as the dollar amounts the NFCC returns to credit card companies with their debt consolidation efforts through 501c3 non-profit agencies like MMI

August 17 2011 at 10:24 AM Report abuse +1 rate up rate down Reply