Feature: Innocent Ways To Wreck Your Credit

Sometimes a credit report can be hurt by financial moves that might seem harmless at first. Avoid them and you can protect your score from a downgrade.           




You already know that late payments or a bankruptcy filing can damage your credit score. But did you realize that otherwise insignificant financial decisions can also cause your score to plummet? Keep your credit report pristine by avoiding these potentially destructive moves whenever possible.

1. Opening a department store card

It may seem like a great idea when the cashier suggests it: open a store credit card, receive an instant discount on your purchase. But it often pays to decline the card in spite of the discount, because the savings may not be worth what the transaction will do to your credit score. New card applications initiate a hard inquiry on your credit report, which can lead to a drop in points.

2. Closing a credit card account

If you've scrimped and struggled to pay off a card, your initial reaction may be to cut up the plastic and close the account. Resist the urge. Various factors are taken into account when calculating your creditworthiness, and 15% of your score is determined by the length of your credit history. By closing an account, especially an older one, you shorten your credit history. The more established accounts you have, the higher your credit score.

Credit card companies also look at how much of your available credit you are using, which is referred to as your credit utilization rate. They like to see 35% or less of your credit in use at any one time. Paying off a credit card and leaving it open improves your utilization score, but closing it could do just the opposite.

3. Keeping a zero balance

Paying off a credit card completely seems as if it should do wonders for your credit, but it could be better for your credit score to leave a small balance on the card. When a small amount is owed, the remaining credit on your card is factored into your credit utilization ratios, whereas cards with no balance don't count. So oddly, your credit score can actually drop when you bring a card balance down to zero.

4. Disputing a credit card transaction

Of course, you should always call your card issuer if a curious charge appears on your credit card. But be aware that filing a formal dispute may cause the card to be temporarily removed from your credit scoring, which could negatively affect your credit utilization score. If possible, avoid filing disputes within 60 days before applying for additional credit.

5. Purchasing a cellphone plan

Many of today's cellular phone providers check credit history to make sure that you pay your bills. But doing this constitutes another hard inquiry that is likely to ding your credit score by a few points. Shopping around for the best cellphone deal is a good thing -- just be sure that every provider isn't checking your credit.

6. Buying auto insurance

Again, most major auto-insurance carriers check your credit report when you apply. While a good credit score can earn you lower rates on insurance, make sure the savings you receive from the new policy outweigh the potential hit to your score.

7. Negotiating a lower APR

Negotiating a lower annual percentage rate on your credit card may seem like a smart move for cutting expenses and boosting your savings account, but when you do, ensure that your creditor doesn't reduce your credit limit. If that happens, it could affect your credit utilization ratio and lead to a drop in points.

8. Taking out a student loan

Student loans are often reported as they are disbursed, which means that a single loan can appear on your credit report multiple times. For instance, if you receive loan disbursements each semester during four years in college, this could look like eight separate loans. Consolidating all of the loans after graduation can improve your credit score, but in the meantime, be wise about your borrowing.

9. Keeping a high balance

The amount you owe on your accounts determines about 30% of your credit score. Lenders consider those who use a low percentage of their credit -- such as 35% or less -- to be a low credit risk. Such individuals get a higher credit score as a result. Spending 80% to 90% of your available credit limit negatively affects your credit score for the opposite reason.

10. Buying a motorcycle

It might seem unfair because motorcycles are technically vehicles, but a loan to buy one is often categorized as revolving credit. This can lower your credit score, since such loans look no different than substantial credit card debt does. So make sure you really want that new sport bike before you roll it out of the showroom.

Naturally, some of these transactions are easier to avoid than others. But by knowing the threat they pose to your credit, you can better understand when these moves really make sense.