9 Financial Behaviors Typically Lead To A Low Credit Score


Having a high credit score not only opens the door to financing larger purchases, but it also helps you save money by qualifying for lower interest rates.

Because of this, building a good credit score is essential since a low credit score can negatively influence your financial situation.

That’s why you must recognize what kind of financial behaviors can impact your credit score.

A missed payment and having a high balance are common financial behaviors that typically lead to a low credit score.

However, they’re not the only ones.

Other unexpected financial behaviors, such as maxing out credit lines and closing credit accounts, can also cause your credit score to plummet.

In this article, I’ll show you what financial behaviors typically lead to a low credit score and what to do in order to avoid making these costly mistakes.

9 Financial Behaviors Typically Lead To A Low Credit Score

Understanding Credit Score Basics

Financial Behaviors Typically Lead To A Low Credit Score

In order to understand how you can negatively impact your credit score, we need to know how your credit score is calculated.

There are three major US credit bureaus that track your credit history, Equifax, Experian, and TransUnion.

Your credit history is what Fair Isaac uses to calculate your FICO score, and there are 5 major factors that influence your score.

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • New credit and recently opened accounts (10%)
  • Credit mix (10%)

Your behaviors and decisions with your finances influence these factors and if you make poor decisions, you will hurt your credit score.

But if you make smart financial decisions, you will be rewarded with a higher score.

Here is a breakdown of the behaviors that harm your score.

#1. Making Late Payments

Missing a monthly payment is one of the biggest culprits of a low credit score.

As mentioned earlier, 35% of your credit score is based on your payment history, so making late payments can have a big negative impact on your score.

Even a single missing payment can bring your credit score down.

But of course, the damage depends on how late you make payments.

For example, a 90 day late payment can result in a staggering 180-point drop, depending on your credit history.

However, a single 30 day late payment usually has a less severe consequence, especially if you have an excellent credit history.

How To Avoid This Mistake

To avoid making this costly mistake, you need to do everything in your power to pay on time.

The best way to do this is to set reminders or setting up automatic bill pay.

You could even make it a habit to pay your bill when your statement comes in the mail.

Even if you don’t have the money to pay your balance in full, you need to at least pay the minimum to avoid late payments.

And if you are late on a payment, call your creditor immediately and plead your case.

If you are a customer with a solid history with the company and it’s not too long after your payment due date, they sometimes are willing to not report the late payment.

#2. Making Minimum Payments

Another important factor that can hurt your credit score is by only making minimum payments.

To be clear, as I mentioned above, if you have to make the minimum payment just to avoid being late, then do it.

I realize life happens and every so often we end up spending more than we can afford to pay back.

The key is to not let your spending remain out of control so you can only make minimum payments going forward.

When this happens, you build higher and higher credit card debt each month.

Not only does this make it harder to become debt free, but it hurts your credit score.

This is because your debt to credit ratio will be high.

For example, let’s say you have 2 credit cards with a $2,000 credit limit on each one.

If you make it a habit to overspend, you might eventually see you have $2,500 in credit card debt.

Having a $2,500 balance on $4,000 worth of credit puts your debt to credit ratio at 63%, which is higher than creditors like to see.

Ideally, you want to stick to 30% or less for your debt to credit ratio.

When you go above this, you negatively harm your credit score.

How To Avoid This Mistake

To avoid this, you need to pay attention to your credit balances.

If you notice that you cannot make payments in full or that your balances are getting higher and higher, you may need to go on a spending freeze.

Take a few months off from spending so much.

If you are spending money on necessities and are unable to cut back, then you need to take a more detailed look at your financial life and make some changes.

#3. Maxing Out Credit Lines

max out your credit card

If you consistently max out your credit lines month after month, your credit score will drop.

A high credit utilization rate is a red flag to creditors that you’re relying on credit as your lifeline and might be experiencing financial trouble.

That said, if you max out a credit card but manage to pay it in full before your next bill due date, your credit score won’t be affected.

This is because credit card issuers typically only report the information to the major credit bureaus once a month.

How To Avoid This Mistake

As mentioned before, you need to make sure you keep your credit card balances at a level that allows you to pay them off quickly.

Usually maxing out credit cards means you are relying on them too much and you need to review your financial situation and make some changes.

#4. Trying To Open Multiple New Credit Accounts

Trying to open multiple new accounts in a short time window can also negatively harm your credit score.

When you complete a credit application, a lender will likely check your credit and see if you qualify.

This is considered a hard inquiry, which remains on your credit report for two years.

Recent hard credit inquiries can lower your credit score by a few points.

While this doesn’t sound too bad, you should consider this fact before trying to apply for a handful of credit cards at once.

That said, being denied a credit application won’t affect your credit score.

As mentioned earlier, it’s the applications themselves that negatively impact your credit health.

How To Avoid This Mistake

Be patient when it comes to credit accounts and only open them as needed.

You likely don’t need to open 5 credit cards at once.

Pick the one that best meets your needs and open that one.

#5. Not Using Different Types Of Credit

Ten percent of your credit score relies on your credit mix.

This means that depending on just one type of credit line, such as credit cards only, can negatively affect your score.

Handling different types of debt signals that you’re an experienced borrower and thus, improves your credit score.

It’s recommended to have a good mix that might include credit cards, personal loans, auto loans, and so on.

However, don’t open multiple credit lines at once without paying the bills on time so this strategy doesn’t backfire.

How To Avoid This Mistake

The same logic from above applies here.

Don’t just take out a car loan, a student loan, and open a credit card in hopes of improving your credit score.

Open credit accounts as you need them.

Be patient with your credit score.

As long as you are smart about it, it will rise over time.

When I was in college, all I had was one credit card and a student loan.

I didn’t take out an auto loan until I was close to 30 and my credit is fine.

Remember, the biggest influence is paying on time.

If you get this right, the rest will fall into place.

#6. Closing Credit Accounts

how to stop using credit cards

Closing a credit account can harm your score in several different ways.

First, you lose a portion of the credit limit calculated in your credit utilization ratio, which causes your debt-to-credit ratio to spike, which can bring your credit score down by a few points.

For example, let’s say you have two credit cards, each with $1,000 available credit limit.

If you have a $500 balance on one card, you are utilizing 25% of your credit limit, $500 of $2,000.

But if you close the account without a balance, you are now utilizing 50% of your credit limit, $500 of $1,000.

Closing an account can also make you lose a part of your credit mix.

Fewer accounts in the credit mix translate to a lower credit score.

Finally, if the account you’re closing is old, it can impact the length of your credit history.

Your credit history accounts for 15% of your credit score and provides proof of your ability to repay debt obligations.

How To Avoid This Mistake

Leave old credit card accounts open, just stop using them.

Eventually, you will receive a letter from the credit card company telling you they will close your account unless you use the card.

When this happens, go buy groceries that week and put the purchase on that credit card.

Pay it off in full and then stop using it again until you get another letter in the mail.

#7. Paying Off Your Loan

This may seem counterintuitive, but yes, paying off certain types of loans can influence your score negatively.

There are two types of loans:

  • Revolving loans, such as credit cards
  • Installments loans, such as a mortgage or student loans

When you pay off revolving loans, your credit account stays open.

That’s why paying off such loans, such as credit card payments, contributes to a higher credit score.

However, paying off an installment loan and fulfilling your obligation means your account is closed.

Thus, you lose one part of your credit mix, and you’ll see a slight dip in your credit score. 

However, this shouldn’t stop you from paying off your loans.

How To Avoid This Mistake

Don’t overthink this one.

You aren’t going to get ahead financially by being saddled with debt.

And keeping debt just to prop up your credit score isn’t a wise move.

This is because the increase you get from carrying a balance is minimal.

Furthermore, the dip in your score when you do pay off an installment loan is minimal and short lived.

Work hard to get out of debt, and be open to the fact that your credit score will fluctuate a little month to month.

#8. Ignoring Collections Calls

If your debt gets to the point where you stop paying it and it goes to collections, you will start getting collection calls.

These companies are trying to get the money you owe back.

Most people find these calls annoying and in some cases, they are harassing.

But the biggest mistake you can make is ignoring them.

This is because collections are reported on your credit report.

And if you avoid paying back the money you owe, your credit score will drop even more.

How To Avoid This Mistake

As annoying as they are, you need to try to work with the collection agency.

Remember they are trying to get the money back you owe them.

Talk with them and try to work out a compromise where you can pay back a portion of the money you owe and they write off the rest.

If you can’t come to an agreement, you might want to reach out to a professional for some help.

The National Foundation For Credit Counseling is great first step.

The sooner you are able to pay back the money owed and stop the calls, the less stressful your life will be and the faster you can get back to rebuilding your credit.

#9. Not Reviewing Your Credit Report

credit report

This is an often overlooked behavior that can destroy your credit.

With the prevalence is identity theft, chances are good that at some point you will become a victim.

But it’s not just identity theft that has an influence.

Credit bureaus can make mistakes when entering information your report that can hurt your score.

By checking your credit report every year, you can spot any possible incorrect information or cases of fraud.

For example, on my credit report, it showed one address I lived at 3 different ways, 2 of which were wrong.

I can’t say for certain that this error had an impact on my credit score, but I didn’t want to risk it so I corrected it.

How To Avoid This Mistake

Set an annual reminder to review your credit report.

You can get a free copy of your credit report at AnnualCreditReport.com from all 3 credit bureaus.

Take the time now to spot anything unusual.

I know you might not think this is a big deal, but the longer a mistake or fraud goes on, the bigger the impact it has on your credit score.

Not only that, but the harder it is to fix, which leads to more work and stress on you.

Understand that the link above only gives you free credit reports, not your credit score.

The major credit bureaus charge for your credit score.

But you can get it for free by using Credit Sesame.

Not only that, they will help you understand your credit report, so you can make the best decisions to increase your score the fastest.

Final Thoughts

There are the 9 biggest financial behaviors that typically lead to a low credit score.

Hands down, making late payments is one of the biggest culprits of a bad credit score.

That said, you must also be aware of your other financial decisions and how they can influence your credit score in the long run.

Always be aware of your financial decisions to build a good credit score in the long run.

And know that if you do make a mistake, your credit score will drop relatively fast.

But don’t be alarmed.

As long as you implement good financial practices going forward and are patient, your credit score should bounce back within a few months.

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