5 Ways to Damage Your Credit Score

How to improve your credit score. It's a topic discussed endlessly in the small business world. And for good reason: No one really knows the answer. Actually, that's not true. Lenders know, but they're not telling.

So let's look at the other side of the coin: how to damage your credit score. Avoid these mistakes and you can be sure your score will benefit. We'll avoid the obvious advice -- don't declare bankruptcy, don't ignore a credit card payment for more than six months -- because it's, well, obvious.

Here are five less evident ways you can shoot a hole in your credit report. A lot of them you know already. But you may not know how harmful they can be:

  1. Mismanage your credit card balance. It's never a good idea to exceed the limit on your credit card, but sometimes it can be hard to avoid, even if you diligently monitor your balance. If you're hovering near your credit ceiling, a common merchant practice called credit card blocking could easily push you over the max without your knowing it. Something else you may not know is that it's best for your credit score if you maintain your card balance at 15 percent to 25 percent of your limit.
  2. Pay your bills late. Throw a household bill on the table and forget about it. This is another simple mistake that will do damage to your credit score, especially if you're one of the many small business owners who uses personal credit to run your business. Or even if you're not. A lot of lenders now employ blended commercial scoring models that look at both personal and business attributes to evaluate your business creditworthiness. Luckily, paying a bill a few days late won't do a lot of harm. But missing a cycle entirely will do major damage.
  3. Use the same card all of the time. It's simpler to pay for everything with the same credit card. It's also a good way to compile enough rewards points to get something better than a shoulder bag emblazoned with your card issuer's dumb logo. But your credit score will trend higher if you mix up your payment methods (credit, debit, etc.). This is also a reason not to close down old credit card accounts. It's better for your score if you keep them active.
  4. Apply everywhere. About 10 percent of your credit score depends on the number of credit applications you've made recently. So don't use the shotgun approach. Apply only when you truly need credit.
  5. Lose your edge. The bigger they are, the harder they fall. It's true of people in funny viral videos, and it's true of your credit score, too. Which means that the more you work to get your score up in the high 700s, the more you have to work to keep it there. Because the higher your score, the more points you'll lose due to a negative event. Why? Credit-scoring formulas are very sensitive to any sign that you're getting in over your head.


Follow Tim and Tom on Twitter at @timntom.
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