6 Ways You Might Be Hurting Your Credit Score

If you've been trying to boost your credit score--which is a good idea, since people with higher scores tend to pay lower interest rates on loans--you might be going about it all wrong. It turns out that many people don't know just what helps, and hurts, their credit scores. Here are six ways you might be accidentally damaging your score:


1. Avoiding credit altogether. While living a debt-free life sounds like a good idea, it can actually make it harder to take out a loan when you want to. That's because lenders look for experience with managing debt--they want to see that you can make consistent, on-time payments each month--before deciding whether or not to issue you any more of it.
 [The Dangers of Avoiding Credit]

2. Comparison shopping. While checking around for the best price is a savvy move in theory, in practice, it can ding your score. When you call different lenders to check on mortgage rates or auto loans and they issue you a quote, they first check your credit history with the credit bureaus. That can look like you're preparing to take on too much debt, which concerns lenders. While the impact isn't huge, it can hurt people with limited credit histories more, because they don't have much experience to balance out the negative impact from the credit checks.



3. Closing accounts. After paying off a credit card debt, you might be tempted to shut down the account for closure. But that move can actually hurt your credit score, because lenders look for experience with long-held accounts. If you've had that credit card for a long time, consider hanging onto it even after you pay it off, because it reflects well on your ability to manage credit over time.

4. Lowering your credit limit. While you might want to lower your credit limit, especially if you share a card with someone you think might overspend, such as a spouse or college student, to prevent a card from racking up a huge bill, think again, because lowering your credit limit can hurt your credit score. That's because you appear more credit-worthy if you are using only a small portion of your overall available credit.
In fact, if your total debt on a card approaches the credit limit level, then your score can get dinged. People with the highest credit scores tend to use about 10 percent of their total credit limits.

5. Opening up a retail card account to snag a discount. It might sound logical to open up that department store card so you can get the 10 percent discount on your purchase--but doing so could hurt your credit score. That's because opening up new accounts can set off a red flag that you're taking on too much debt, which can send lenders running in the other direction.

[Why Seniors Are In Trouble With Credit]

6. Maintaining a small credit card balance from month-to-month. Making only a minimum payment on a credit card, or paying anything below the full amount due, leads to more debt along with interest and fees. But some people carry that debt anyway, because they erroneously think it shows they can manage and maintain their accounts. To lenders, though, it can just look like the borrower is getting in over his head, which can eventually trigger higher interest rates on the account. So pay off that monthly balance whenever possible, and as soon as possible.

Given all these misconceptions, it's no wonder that credit reports can be extremely confusing. In fact, a survey by ING Direct found that only five parents out of 1,042 could correctly identify many common behaviors, including closing old credit card accounts and never having a credit card, as damaging to credit scores. (But over 80 percent knew that paying bills late or paying a mortgage late could ding their scores, and seven in 10 correctly named "exceeding a credit limit" as a bad idea.)

[Related: A rapid rescore can fix your credit score in a hurry]

The survey also revealed that many people falsely believe that recommended behaviors, including checking credit reports, can hurt scores. But financial experts recommend checking your credit report once a year, free of charge, at AnnualCreditReport.com. You usually have to pay to obtain your actual score, but getting the report alone will allow you to check for mistakes.
Take time to take care of your credit, and you'll thank yourself when it's time to take out a big loan.

The Dangers of Avoiding Credit

My 25-year-old coworker thought she had done everything right when it came to protecting her credit. She paid off her student loans early. When she does use a credit card, she pays it off in full each month. And she’s never been late on a monthly bill. Her credit score was over 750, which is considered excellent.

Despite that stellar record, multiple lenders turned her down for a mortgage earlier this year. The reason, they told her, was that her credit record was simply too light. Since she had paid off her student loans and didn’t use much credit elsewhere, they had no way of knowing whether or not she would be responsible with a mortgage. In other words, she was being penalized for living a relatively debt-free life. To make matters worse, one of the lenders told her that because she was shopping around so much for a loan, the multiple inquires into her credit report were starting to negatively impact her score.

Her experience gets at one of the great weaknesses of our credit reporting system: In order to borrow money, you have to have already borrowed money. That’s the only way you can demonstrate that you are “credit-worthy,” as the credit reporting bureaus put it. To get to the bottom of this conundrum, I spoke with Rod Griffin, public education director for Experian, one of the big credit reporting bureaus. Here are two truths and four myths about credit reports:

Truth: Having little experience with credit can make it hard to take on a mortgage.
The first thing lenders look for when assessing whether or not they want to give someone a mortgage is their credit history, says Griffin. That means you need to have open, active credit accounts in your name in order to demonstrate that you can handle credit.

Truth: Comparison shopping can hurt your credit score (a little).
For large purchases such as mortgages or auto loans, lenders expect consumers to shop around, so credit bureaus lump inquires that happen within a certain time period (usually 14 to 30 days) together. That means they have only a minimally negative impact on your credit report, says Griffin, so consumers don’t need to worry about shopping around, and in fact, it’s probably a good idea to do so.
But when someone—such as my young coworker—has a limited credit history to begin with, that minimally negative impact can make a bigger difference. And in fact, on her credit report, it says she’s been dinged for having “too many inquiries in the last 12 months.”
So what can someone in that situation do? The only solution is to wait it out, says Griffin. “You need to demonstrate over time that you handle your debts well, and that will be reflected in positive credit scores.”

Myth: Paying off your loans early hurts your credit report.
When you pay off a loan, your credit history is updated to reflect that, but it is still considered useful information and, because it’s positive, typically stays on your credit report for 10 years, says Griffin. (Negative information, such as a delinquency, only stays on your report for 7 years.)
But lenders have their own criteria, which is the problem my coworker likely ran into. Her lenders required her to have at least three open, active accounts for 24 months or longer, and her student loans didn’t count since they were paid off.

Myth: Your credit accounts need to be in your name only to strengthen your history.
You can build up your credit history with your parents’ help if they are willing to share a credit card with you, for example, or add you as an authorized user onto their accounts. “That’s a good starting point,” says Griffin. You can also put utility bills and other accounts in your name, even if your parents are the ones footing the bill.

Myth: College students should take out lots of credit cards to build up their credit report.
While college is a good time to wade into the credit waters and learn how to use a credit card responsibly, there’s no need to take on multiple cards, and in fact, taking on too much debt and failing to make payments will hurt your credit report. Limited and responsible use is probably best. That’s why Griffin and others in the credit industry are worried that the new Credit Card Act, which places restrictions on college students’ access to credit cards, could ultimately hurt young people’s ability to build their credit histories.

Myth: You need to take on debt in order to take out more debt.
It’s not a history of debt that you need, but a history of credit. That subtle distinction makes a big difference, because it means you don’t need to rack up credit card bills, you just need to use a credit card and pay it off each month, for example. “Credit and debt aren’t the same thing,” explains Griffin.
My coworker’s story has a happy ending. She was able to eventually buy a condo in the building she liked, but only with her parents’ help. Because of her limited credit record, lenders required a 20 percent down payment from her. It took her extra time (and her parents’ support) to save that much, but eventually she did, and now she’s a homeowner—with a beefed up credit record.

Why Seniors Are in Trouble With Credit

It might be time to help your parents—and grandparents—check their credit reports.
A new study, published in the CSA Journal, found that seniors are racking up greater amounts of debt and also face more problems on their credit reports than younger consumers. One in three people across all age groups reported finding some kind of mistake on their credit reports, and a greater percentage of seniors (36 percent) found errors. In one in four cases, the errors were significant enough to make an impact on credit scores.
The study also found that younger consumers were more likely to track their credit reports, while just one in four seniors did so. According to the Society of Certified Senior Advisors, which publishes CSA Journal, seniors should regularly check their credit reports, especially since they tend to have lower risk tolerance and lower earning power. Consumers can access their credit report for free at AnnualCreditReport.com.
Here are some tips to make sure your credit report is accurate:

• Get an annual checkup. Obtain a copy of your credit report—it's free once a year—at AnnualCreditReport.com. You have to pay to obtain your actual score, but getting the report alone will allow you to check for mistakes. And don’t fall victim to a site that requires payment for a credit report and then automatically enrolls you in a credit-monitoring service.

• Fix errors. Credit bureaus are required to correct errors by law. If you see a mistake, contact them, either through their website, over the phone, or by letter, to explain what's wrong. The Federal Trade Commission recommends including copies of any documents that support your position as well as the copy of the report itself, with the errors circled. The FTC offers a sample dispute letter on its website.

• Maintain a paper trail. Keep copies of everything you send to the bureaus, and request a return receipt at the post office so you know they received your mail.

• Beware of credit-improvement scams. Dozens of companies offer to help you improve your credit score for a fee, but the easiest (and cheapest) method involves a pretty basic technique: Pay all your bills on time, stay well under your credit limits, and keep accounts in good standing over many years.
If you’re not happy with your current credit rating, here are some easy ways to give it a boost:

• Pay your bills slowly and steadily: The surest way to boost a credit score is to pay bills on time and keep accounts in good standing over many years. Avoiding credit altogether can do more harm than good, since lenders want to see that consumers have experience managing credit accounts.

• Don’t co-sign for a friend or relative: Even spouses can harm each other’s credit by co-signing for a credit card. Once your name is on account, you’re responsible for it, even if you break up. So limit your exposure to that risk by avoiding co-signing accounts whenever possible.
Despite rumors to the contrary, having a good job does nothing to boost a credit score. In fact, income has no effect whatsoever on a score. The only thing that matters is your credit history—whether you pay your bills on time.
If you do run into financial trouble and have to resort to filing for bankruptcy, your credit score can begin to rebound after one year of making on-time, regular payments. Then, after seven to 10 years, it can fully recover.

The bottom line: Use annualcreditreport.com once a year to check for any errors on your report and pay bills on time. Consider helping any older relatives to do the same.

A rapid rescore can fix your credit score in a hurry

A few credit score points can mean the difference between a good mortgage rate, a lousy one or getting a loan at all. But take heart: If errors are dragging down your score, you can get them fixed, just in time for your much-anticipated closing.
Rapid rescoring, a practice employed by mortgage lenders and brokers to help lift clients' scores to qualify for better loans, allows borrowers to get accurate information updated into credit files within a few days, rather than waiting weeks or months for the credit bureaus to do it on their own.
That faster timetable could save you thousands of dollars on your loan. In the 2012 mortgage market, "Raising someone's middle FICO score from 699 to 720, for example, will save 1.25 percent in fees," says Joe Parsons, a senior loan officer at PFS Funding in California.  "In our residential mortgage practice, we frequently do rescores for borrowers. The cost is minimal, and the improvement in mortgage pricing is very significant."
"When you're in a tight lending environment, every single point counts," adds Karen Carlson, director of education for the nonprofit Florida credit counseling agency InCharge Debt Solutions. That's especially true, she says, if you have a middle-of-the-road credit score and are hoping to take advantage of today's record-low interest rates. "It's hard to qualify for a loan, but if you qualify, the rates are phenomenal," she adds. 
How rapid rescoring worksA rapid rescore is essentially "an unofficial updating of the credit file," says Wayne Sanford, president of the Texas-based credit consulting firm New Start Financial.
For example, if you pull your credit reports and see that there are legitimate errors on them that are pulling down your credit score, a rapid rescore can help you get those errors corrected much faster than if you tried to dispute them yourself.
"If you try to do it yourself by doing a dispute directly with the bureaus, then they have 30 days, technically, to investigate the dispute and get back to you with an answer," says Mindy Leisure, director of product development for Advantage Credit, a Colorado-based company that provides rapid rescoring services for loan officers.
However, if you have a rapid rescoring service get the errors corrected for you, they'll provide proof to the credit reporting agencies that the errors are bogus and have your credit score recalculated to reflect the changes, usually within a few days.  
Your mortgage broker may also recommend a rapid rescore if you have high balances on your credit cards and just need to add a handful of points to your score to get the loan you want. "Loan officers have access to something called a 'what-if' simulator," says Sanford. "A what-if simulation is basically a mathematical model that the mortgage companies work with to say, 'What if they paid off their credit card?'"
If a loan officer sees that you can boost your score by enough points to qualify for a lower-interest loan, he or she may ask you to pay down your credit cards to below 30 percent of your credit limit and have you print out proof of your new balance.
That information will then be expedited to the credit reporting agencies so they can update your file without waiting for the credit card issuer to report your updated information. "There are some credit cards that report to the bureaus at the beginning of the month, some at the end of the month, some only every other month," says Leisure. "By doing a rapid rescore, we can get that information corrected within three business days."
For Byron Nelson of Dallas, getting his score updated faster meant getting approved for a home loan that he may not have qualified for otherwise. Just seven points shy of his target credit score, Nelson paid down one of his credit cards and sent the proof back to his lender, which initiated a rapid rescore. Having previously raised his credit score from the low 500s to the mid-700s, the approval that he received soon after was a major victory. "It just changed my life, drastically, for the better," says Nelson.  

Rapid rescoring is not credit repairProponents of rapid rescoring are quick to point out that it's not a form of credit repair -- an industry whose bad apples promise, illegally, to erase accurate negative information from consumers' credit reports. Rapid rescoring should only be done through a mortgage broker or lender. "I'd be a little leery actually of anything that offered a rapid rescore directly to the borrower," says Leisure. "That almost borders on credit repair and when it comes to credit repair, I just say 'no.'"
Typically, a rescore costs between $25 and $30 per updated account. However, your mortgage lender or broker is supposed to pay for the service, not you, says Leisure.
  That's because credit reporting agencies view rapid rescore requests as an "expedited dispute process," she says and, under the Fair Credit Reporting Act , borrowers aren't allowed to be charged for disputing inaccurate information. "A lot of loan officers will tell you they are not aware of this, but they are," she adds. "It even states on our forms that the mortgage company fills out to request a rescore that the borrower cannot be charged for it."
It's also important to remember that the only information you can dispute is inaccurate information, says PFS Funding's Parsons. "What we find is when somebody's got a low credit score, they have lots of excuses for why this [negative information] is on their report," he says. However, you can't explain away accurate blemishes, such as missed credit card payments.
Nor can you make them magically disappear. "A lot of people don't realize that," he adds. They will pay off a delinquent account and expect it to fall off their report. However, it doesn't work that way, he says. When it comes to negative but accurate information, all you can do is wait up to seven years for the negative information to disappear.

Quick updates for a fast-moving world 
The good news is if your complaint is legitimate, you have a good chance of getting it rescored when you need. That's a big deal for consumers who are used to faster answers, says InCharge Debt Solution's Karen Carlson.
"In today's world of apps and instant feedback and real-time data, I think that rapid rescoring is something that people are going to expect," says Carlson. As people get used to on-demand answers, waiting a month or more for a credit score to be recalculated just isn't going to cut it. "Consumers are demanding these real-time updates in order to achieve their financial goals," she adds.

The dangers of using your home as your retirement nest egg

Somewhere out there, maybe on a block near you, is a couple nearing retirement who sees dollar signs when they think of selling their home. For them, that for-sale sign on the front lawn doesn't just represent a business transaction but rather the dream of living out their golden years in style by living off the proceeds.

Using your home as your sole retirement nest egg might be common a financial strategy these days, but it's also a risky one, say two Canadian financial experts.
"In the last five, 10 years we've seen real-estate prices go up dramatically, but they don't always go up," says financial advisor and portfolio manager Clay Gillespie, managing director at Rogers Group Financial. "Real estate is like any equity market; it will have its peaks and troughs.
"In the last five years housing prices have done better than most other assets; it seems like the only way you can make money. But that isn't always the case. It's a risky strategy because doesn't allow you to retire and generate income when you want to do it; you have to time it with the market."
Demographics will make home sales harder
Although many Canadians have done well in the recent past selling real estate, the strategy is only going to get dicier in the coming years because of shifting demographics.
When Baby Boomers are ready to sell, there may not be enough qualified buyers to purchase their homes, explains Assante Capital Management Ltd. senior financial planner Adrian Spitters.
The biggest group of potential buyers will be the Boomers' own kids, a group known as the Echo Boomers or the Millennial Generation. They're smaller in number than the boomers themselves, and many have stretched their resources to qualify for their first home using minimum down payments at historically low interest rates.
"They are now tapped out," Spitters says. "They will simply not have built up enough equity to even consider moving up when the Boomers are ready to downsize.
"When you have a potential mass wave of sellers trying to downsize their homes to shore up their retirement portfolio at a time when house sales are slowing and there are not enough buyers willing to or able to absorb the inventory of homes for sale, house sales will stagnate and prices will suffer."
Mortgages matter
Making matters worse is the fact that a lot of boomers will still be carrying a mortgage as they head into retirement. According to TD Canada Trust's "Boomer Buyers Report", only half of those surveyed have paid off their entire mortgage. Of those with a mortgage, three-quarters still owe 40 per cent, and one quarter still have a long way to go, having paid off less than 25 per cent.
"If they don't have much saved up for retirement and are still carrying a mortgage when they retire, how are they going to fund their retirement from their home? It only takes one marginal home owner who's desperate to push the prices down," he says.
"These retiring Boomers will have few options to fund their retirement. They will have limited ability to tap into their home equity to supplement their retirement income. This may leave them with few options, forcing them to sell their home, downsize, and pay off their mortgage. In some cases they may need to rent, since they may not have enough equity in their home to fund a retirement portfolio after downsizing."
Twenty per cent of Canadians are going into retirement with debt higher than $100,000, a Rogers Financial Group survey found.
"It's unwise to just use housing as your only means for saving for retirement," Gillespie says. "You have to do other asset classes. You have to have some government pensions, RRSP savings, and your own savings. There's no silver bullet.
"The problem with real-estate investment is you can't sell 1/20^th of your home," he adds. "It's not the panacea people make it out to be."
Advice for first-time home buyers
For younger people looking to get into the market, Spitters suggests being patient and building up as much of a down payment as possible by maxing out tax-free savings accounts.
"There's a false belief that the government is going to keep interest rates low and that housing prices aren't going to fall," he says. "There's a mentality now that you better buy before you get priced out of market, but don't rush into it. That could be a financial trap for people with interest rates going up.
"Real estate is cyclical, just like the stock market."