Keeping a High Credit Score: How Doing the “Right Thing” Can Hurt You

For many consumers, their credit score is a number that emerges from a mysterious black box through a process that is unknown and unknowable.  Over the past decade, the federal government has attempted to pull down the veil to some extent, with Congress passing a bill that allows consumers to receive a free credit report annually and the Consumer Financial Protection Bureau (CFPB) urging credit card issuers to provide credit scores to their customers.  However, despite these efforts to increase transparency, few consumers take advantage of opportunities to monitor their credit.  According to the CFPB, fewer than one in five Americans check their credit report in a given year.

Why Does It Matter?  Checking your credit reports and credit score regularly could help guard against identity theft and help you to maintain the optimal credit profile (see below).  Those who have been lax about monitoring their credit might receive an unpleasant surprise when applying for a mortgage, new job, new apartment, car loan, student loan, etc.  A low credit score could hinder you from obtaining a loan or could make it more expensive by forcing you to borrow at a high interest rate and increasing the monthly payment on your loan.  And, unfortunately, it is possible to lower your credit score even when you are trying to do the “right thing.”  While most consumers are aware that paying bills late or maxing out available credit could hurt their credit score, some may not be aware that having too few or only recently opened credit cards could hurt their score as well.  As one client recently discovered, even an attempt to simplify and closely manage your credit by having just one credit card can lead to a higher interest rate on a loan.

What Constitutes an Optimal Credit Profile?  In determining your eligibility for a loan, lenders can use different types of credit scores that prioritize various aspects of your credit profile.  However, based on the information provided by credit card issuers, consumers should maintain a high score if they stick to the following guidelines.

Obviously, one or more marks in the “DON’T” category may significantly drag down your credit score, but, just remember, even if you avoid the “DON’T” category, lenders may still deny you the best interest rate if your credit profile does not meet the optimal criteria listed in the “DO” column here.  Be vigilant about following these five guidelines, be sure to check your credit report annually to protect against identity theft, and enjoy lower interest rates thanks to gaining some insight into that mysterious black box.