Understand how certain actions will affect your credit score.
Maintaining good credit is essential for your financial success. But how do you know how certain actions will impact your score. Some financial choices can be good for your score, while others can do more damage than you might realize. This page explains how certain actions affect your credit score, so you can make the right choices for your credit and your finances.
Keep in mind that the amount your score drops for some actions may vary, depending on where you start and your credit history. Still, these estimates can help you set some practical expectations for your credit.
Applying for new credit
New credit applications can be bad for your credit if you have too many applications within a 6-month timeframe. Anytime you apply for a loan or credit card, you must authorize a credit check. This creates a hard inquiry on your credit report that sticks around for two years from the date you authorized the check.
While these hard inquiries appear on your credit report for two years, they only impact your score for 6 months. Each inquiry only drops your score by a few points, but if you have more than one inquiry in six months, the impact starts to stack up. Make sure to space out new credit applications to avoid unintended damage.
Declaring bankruptcy is bad for your credit, but in some cases it’s better than the alternative. A Chapter 13 bankruptcy stays on your credit report and affects your score for seven years from the date of discharge. Chapter 7 bankruptcy stays on your credit for ten years from the date of final discharge. The damage to your score usually falls somewhere between 160 to 220 points.
On the other hand, not declaring bankruptcy can also be bad for your credit. If more accounts fall behind and you get new collection accounts as you struggle to pay off your debt and avoid bankruptcy, you can end up doing more harm. So, consider bankruptcy carefully, because it may be your fastest way to get to recovery.
Carrying credit card balances
Some people think you need to carry credit card balances over month-to-month to maintain a high credit score. You don’t. In fact, paying off your balances in-full every month is the best thing you can do for your credit score.
Credit utilization is the second biggest factor used to calculate credit scores. It measures the credit you have in use (your total current balance) by your total available credit limit. Lower is always better. In fact, anything over 30% will be bad for your score, so you don’t want to run up balances on your cards!
Closing an old credit card
Closing old accounts can actually be bad for your credit score. One of the factors used to calculate scores is your “credit age” – the length of time you’ve been using credit. Closing an old account that you’ve maintained in good standing decreases your credit age, so it may drop your score. Accounts closed due to inactivity can have the same effect.
If you have a high credit score, then even getting just one collection account can do a lot of damage. You can drop your score by 50 to 100 points. The more collection accounts you have, the lower your score will go. However, the impact of collection accounts on your score decreases over time. An old collection account will hurt you score less than a new one.
It’s also important to note that FICO and VantageScore have both changed their rules for medical debt collections. New scoring models give less “weight” to medical collections, so they don’t impact your score as much as letting a credit card go to collections.
Consolidating debt is actually good for your credit score, as long as you keep up with the payments. Whether you use a credit card balance transfer or debt consolidation loan, your credit score should get a boost from consolidation, assuming you don’t miss any payments.
If you consolidate debt by enrolling in a debt management program through a credit counseling agency, the impact your credit is typically positive or neutral. In other words, it may not help you score, but it won’t hurt it either. And for people with bad credit scores, completing a debt management program is usually good for your score.
Settling debt is not good for your credit score, because you don’t pay the debt in full. The debt will be listed as “settled in full” in your credit report. This notation sticks around for seven years from the date the debt first became delinquent. This negative remark is bad for you credit score. The damage here can be anywhere from 50 to 100 points for the first debt settled. If you have a lower score already however, settlement will impact your score less.
If a lender forecloses on your home, it will also negatively impact your credit score. FICO conducted a study of how much foreclosure affects your score. If you have a 680 before foreclosure, you score drops about 85 to 1105 points. However, if you have an excellent credit score (780), then the damage increases to 140-160 points.
Missed monthly payments
A missed payment can drop your score by 90 to 110 points. However, it’s important to note that there’s a difference between a late payment and a missed payment. Missed payments are only reported to the credit bureaus every 30 days. So, if you’re 10 days late and then pay the bill, you’ll face fees, but you won’t need to worry about credit damage.
On the other hand, if you’re more than 30 days late, the creditor will report the payment as missed to the credit bureaus. This negative remark stays on your credit history for seven years. And each additional month a payment is missed, it affects your score even more.
Opening a new credit card
As long as you space out new credit applications, then opening a new credit card will actually give your credit score a boost. That’s because a big factor in how score is calculated is credit utilization. That measures how much credit you’re using compared to your total available credit limit. Getting a new card increases your credit limit, dropping your credit utilization ratio. Thus, it improves your score. Just don’t run up the debt, because that can hurt your score!
Paying off a loan
You probably think that paying off a loan would always be good for your credit score, but immediately after the final payment, you might notice your credit score decrease. That’s because you may be paying off a “good debt” that creditors like to see in your credit history. Diversity of debt (what debts you hold) isn’t a huge scoring factor, but it does count for 10% of your score. Paying off a good debt like a mortgage, makes you mix of debt less diverse. So, your score may drop slightly. But the damage won’t be huge and you should bounce back fairly quickly.
As of 2018, tax liens are no longer reported on your credit report with any of the three major credit bureaus in the U.S. Since tax liens no longer appear on your credit report, they don’t affect you score either. This change applies retroactively, so if you have an old tax lien, it should still no longer appear on your report. This change occurred on April 16, 2018.