Are You Hurting Your Credit Scores Without Knowing It?

Are You Hurting Your Credit Scores Without Knowing It?

Written by Priyanka Correia
Fact-checked by Caitlin Wood
Last Updated May 11, 2022

Good credit has become a necessary precondition to obtaining credit products such as a mortgage, a car loan or even a credit card. Without it, you can end up with high-interest rates and less payment flexibility. In fact, good credit can sometimes help with renting and getting a job as some landlords and employers will check your credit as part of their underwriting process.  

How Bad Credit Can Affect Your Life?

As mentioned, good credit is necessary when accessing different types of credit products. If you have bad credit, it can not only impact your ability to access these products but it can also impact you in the following ways: 

  • Higher Loan Costs – If you have poor credit, most banks won’t approve you for a loan. You may have to apply with a private or alternative lender instead who often have more flexible requirements. However, these lenders often charge much higher interest rates and fees to offset the risk they’re taking. 
  • Premium Credit Cards – Credit cards with premium features often require high credit scores for approval. 
  • Insurance Premiums – Most insurance companies will check your credit when determining your premiums. Generally, those with bad credit are considered riskier and may end up with higher premiums. 
  • Renting An Apartment – Many landlords will check your credit as part of their tenant screening process. If you have bad credit, the landlord may reject your application. 
  • Getting A Job – Some jobs, particularly those that involve the management of a company’s finances, may require a credit check. If you have bad credit, your employer may reject you for the job as it may indicate you are financially irresponsible. 

How Are Credit Scores Calculated? 

Depending on who you check your credit score with, you’ll likely get a different credit score number. This is because each credit bureau and credit score provider has its own credit scoring model. However, there are a few common factors that are used by most, though the weight placed on each factor may vary.

  • Payment History (~35%): Your payment history generally accounts for about 35% of your credit scores. As such, missed and late payments may negatively impact your credit. 
  • Debt-To-Credit Ratio (~30%): This refers to the amount of credit you’ve used versus how much you have available. Generally, lenders like to see a ratio of 30% or below. Maxing your credit cards or lines of credit usually isn’t good for your credit.   
  • Credit History (~15%): The age of your credit accounts can also impact your credit. Usually, the older your accounts and the longer your credit history, the more likely it will positively affect your credit. 
  • Credit Inquiries (~10%): Each hard inquiry on your credit report may negatively impact your credit scores. 
  • Public Records (~10%): Bankruptcies, liens, lawsuits and accounts in collections are some derogatory remarks that fall under public records. 

Credit Score Ranges

Excellent760 – 900
Very Good725 – 759
Good660 – 724
Fair560 – 659
Poor300 – 559

Ways You May Be Hurting Your Credit Without Knowing It

There are a number of actions that can potentially negatively affect your credit scores. Below we’ve listed some actions that may be negatively affecting your credit without you knowing it.

Cancelling Your Credit Cards

 While cancelling a credit card may seem like a financially smart move, it may negatively impact your credit scores. When you cancel your credit card, it reduces your credit account age which usually accounts for about 15% of your credit scores. 

When you cancel your credit card, it’ll also affect your debt-to-credit ratio, which measures how much of your credit you are utilizing against how much available credit you have. As an example, if you had two cards with equal limits and you cancel one of the cards, then you would have just halved your available credit while effectively doubling your credit utilization, which can negatively affect your credit.

In general, it’s recommended that you don’t cancel your credit card, and if you must, try cancelling your newest credit card as that’ll reduce your credit account age less than an older card. 

Opening Too Many Credit Cards

Just as cancelling a credit card can reduce your credit account age, opening too many new credit cards ( and other credit products) can also reduce your credit account age. Moreover, each credit card you apply to will result in a hard inquiry which can also negatively affect your credit scores. 

Errors On Your Credit Report 

Removing erroneous information from your credit report can give an excellent boost to your credit.  So it’s beneficial for you to locate, identify, and remove any deleterious information that has been mistakenly placed in your file. 

Moreover, knowing what is on your credit report puts you on the same page as the lenders who are basing their lending decisions on the information that is provided. 

Only Paying The Minimum Payment On Your Credit Card

When it comes to your credit cards, paying off the full balance each month is the best habit to build. Maxing out a credit card and carrying a high balance from month to month means your credit utilization is also high. This is one of the factors that affects the calculation of your scores. Depending on your credit history and the scoring model used, high credit utilization could potentially hurt your credit. 

Not Using Credit 

Racking up too much debt is never a good idea, but not using credit could also be hurting your credit scores. Actively using and paying off debt is how you build credit. Taking on a car loan or personal loan you need and can afford and using a credit card to pay for necessities and bills, can all help build your credit. 

Being A Cosigner

If you’ve co-signed a loan for someone, that could be negatively affecting your credit scores. Any missed payments they make will be reported on both your credit scores, which can negatively impact your credit.

Poor Financial Habits 

Certain poor financial habits can indirectly impact your credit. 

  • Not Checking Your Credit Report – Your credit is a vital part of your financial life, it can either facilitate or prevent you from getting a loan or other credit products. If you’re looking to take out a loan or apply for a mortgage,  you need to know what your credit score is because you’ll be rejected if it’s too low. By checking your credit, you can avoid any unnecessary hard inquiries.
  • Taking On Too Much Debt – The most dangerous thing about debt is how extremely easy it is to create. Too much debt can lead to late payments, a high debt-to-credit ratio and reliance on predatory lenders like payday lenders, all of which can hurt your credit.

What Can You Do To Manage Your Debt? 

Getting out of debt takes serious time, effort and commitment. Depending on the amount of debt you have, you may need more than a budget and better financial habits to manage your debt. 

Here are some things you can do to help manage your debt. 

  • Increase Income – To help pay down your debt, you may need to temporarily get a second job to help pay all your bills. You can also consider increasing your income through more passive means. 
  • Avoid Using Credit – Until you reign in your debt, it’s recommended that you stop using your credit cards and live off the actual money you make.
  • Pay Down The High-Interest Debt First – Always pay off the debt that has the highest interest rate first, then work your way towards your debt with the lowest interest rate.
  • Create A Budget –  Implementing a budget into your everyday life can help your track where your money goes and prevent overspending. 
  • Negotiate With Your Lenders – Get in contact with your lenders to see if they’re willing to create a new payment plan with you. Many lenders are willing to help as it’s better than you defaulting on the loan completely.

If none of these tips help, it may be wise to get some advice from a credit counsellor. For people in extreme situations, they may recommend certain programs such as a debt management program, a consumer proposal or even bankruptcy.

Bottom Line

Keeping on top of your credit game is critical to maintaining healthy credit.  Understanding what affects your credit is one of the first steps in managing your overall credit. That said, always remember to pay off all your credit card debt each month, don’t churn your credit cards, and be sure to check your credit report at least once a year.

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Priyanka is a personal finance expert at Loans Canada. She is passionate about money management and educating Canadian consumers about how to take control of their financial lives. She has taken financial control of her life by using Mint to budget and track her expenses while growing her wealth by investing through Wealthsimple. She also believes in having an emergency fund, so she keeps a good sum of money in an easily accessible high-interest savings account. She also uses the American Express Cobalt Card to earn points on all her purchases, further fueling her savings goal. She also uses Loans Canada’s lender directory whenever she wants to compare rates from different lenders.

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