It’s easier than you might think to hurt your own credit score—here are some bad habits to watch out for
By Matt Smith
Canadians’ credit card debt is on the rise: as of September, the average household now owes $1.69 for every dollar of disposable income, according to Statistics Canada. In that sort of economic climate, it’s important to maintain a healthy credit score—and that goes beyond simply paying your bills on time. Even those with a history of timely payments may be inadvertently hurting their credit scores without realizing it, so it’s important to check yourself to avoid or break bad credit habits.
While paying your bills on time is the most important factor affecting your credit score, another significant (and often overlooked) consideration is your credit utilization rate. This refers to the percentage of your total credit that’s used every month. The rate is calculated based on the sum total of all your credit products (such as credit cards or a line of credit); the higher the ratio, the more negative its effect on your credit score.
That’s why it’s a myth (though a popular myth) that closing your accounts on unused cards is good for your credit score. It may seem like a good idea, but reducing your credit limit means that any outstanding balances now take up a greater percentage of your total limit, increasing your utilization rate. If your credit card account isn’t charging you fees, it’s unwise to close it simply to reduce your credit limit.
On the other hand, you may find yourself paying fees on a card you never use and want to close the account. If you do need to close a credit account, try to do so when you have the lowest possible balance outstanding on all your accounts. If your total balance is zero dollars, then the impact on your credit utilization rate is nil.
Applying for credit can also have a negative impact on your credit score. Credit score reviews fall into two categories: hard checks and soft checks. Soft inquiries (such as checking your own credit score) don’t have an impact, while hard inquiries (applying for that store card you were just offered) do. Applying for credit too often can signal to creditors that your accounts are high-risk, bringing your credit score down.