🪤3 Hidden Traps That Lower Your Credit Score🪫

Your credit score is the first thing that a lender looks at when approving your mortgage. It can mean the difference between qualifying for a mortgage or being flat out declined. It’s common knowledge that your score will drop if you’re late on your payments or if collections are filed against you. However, there are three credit score lowering traps that could be hurting your score without you even realizing.  

 

1. Closing Credit Accounts  

Most are not aware that their credit score will drop anytime you close an active credit account. For example, closing one of your credit cards will have a negative impact on your score. This doesn’t mean that you shouldn’t close credit accounts, but you should be aware that it will lower your score. Two examples of this are listed below:

 
Length of Credit History  

When you close an account, you’re eliminating some of your credit history since you’re removing a piece of your credit profile. This is generally not an issue if the rest of your credit bureau is strong. For example, you’re still leaving a least a couple of credit cards intact. If you only have two credit cards and you’re closing one of them, then you’re removing half of your credit history, which could potentially result in a larger impact on your score.  

Older accounts are viewed more favorably by the credit scoring models, so it’s best to leave them open. If you have the choice of closing a card that you’ve had for 20 years vs one that you’ve only had for six months, you’re better off closing the newer account given that it removes much less history from your credit profile.  

15% of your credit score is determined by the length of your credit history.  

 

Ratio of Balances to Available Credit 

When you hold balances on your credit accounts, closing one reduces your total available credit, thereby increasing your ratio of balances to total credit available. For example, with $3,000 owed across all accounts and $10,000 in total available credit, your ratio is 30%. But closing an account with a $5,000 limit hikes your ratio to 60%, which can result in a bigger drop to your score given the large increase in your balance-to-credit ratio. 

This also applies when you make your final payment on an installment loan. As the loan is now paid in full, the account would be closed which will result in a small drop to your score. You don’t have any control over this of course, so there isn’t much you can do about it other than refraining from taking the loan in the first place. The impact is generally quite minimal, so not a concern in most situations.  

The ratio of balances to available credit is responsible for 30% of your overall credit score, which is the same category the next credit score lowering trap falls within. 

 

2. Utilizing Greater than 50% of Your Credit Limit  

Credit scoring algorithms prefer you to use a smaller portion of your available credit. Once your balance on a revolving credit account moves above 50% of its limit, it starts to negatively affect your score. Surpassing the 75% threshold will lead to a greater adverse effect.  

Approaching your credit limit can significantly dent your score. When you use up most or all your available credit, it raises a red flag to the credit scoring models that you’re a higher-risk borrower due to a high utilization ratio. This doesn’t bode well, and your score could take a nosedive—even with timely bill payments. This is because maxing out credit cards might indicate you’re under financial stress or not managing your credit wisely.  

Whatever you do, make sure you don’t go over your limit. Most financial institutions will still let the charges go through. But this doesn’t mean it’s okay. It signals to the scoring models that you’re unable to stay within your pre-set limit, which can result in a large drop to your score.  

How concerned should you be?   

While staying below 50% of your limit can result in an overall stronger credit score, moving above this threshold may not cause noticeable damage. In other words, don’t stress out if you’re using more than 50%. 75% is the more important number as you’re now moving closer to your limit.  

 

3. New Credit / Inquiries  

Most people are aware that new credit checks will lower your credit score, so it’s not exactly a hidden trap. But what you may not be aware of is that your score will also drop when a new credit account hits your report. As you now have additional credit to manage, it takes time for the scoring models to assess how effectively you’re handling it. As you consistently demonstrate responsible credit management with a new account, your credit score will recover and potentially even improve. 

New credit / inquiries account for only 10% of your credit score, so the negative impact of a new credit inquiry or account on your score is generally quite minimal. The amount your score will drop can vary depending on your overall credit bureau. Those with solid credit scores would only see a minimal drop of maybe a few points. Those with weaker or ‘borderline’ credit will experience a larger drop.  

 

The Impact of Multiple Credit Checks  

Equifax will allow you to have as many credit checks as you like within a 45-day window, and it will only count as a single hit towards your score. This is providing that the checks are all mortgage related.  

This doesn’t mean that you should be putting in mortgage applications with every lender and broker under the sun. While the score will not drop further after the first check, each one will be reported on your credit bureau, so each person you apply to will see exactly where you have applied.  

It’s also not necessary.  

If you’re shopping around for the lowest mortgage rate, then most discount brokers will generally let you know the lowest rate up front… no application necessary. It would be based on qualifying credit and income of course, but there should be no need to have your score checked… just to get a rate. This not only saves you a lot of time, but also saves the time of those you’re applying to as well.  

One benefit to dealing with a broker is that we’ll do all the rate shopping for you. While every broker will say they get the lowest rates, there can be a big difference in rates from one broker to the next. At Harmony Mortgage Group sourcing out the lowest rates on the market is something we take seriously, which is why we’re consistently working with different lenders. The lenders we present to you are dependent on who has the best offer at that time.  

We are also monitoring rates for you constantly. If the rate drops, then we’ll ensure that you get the lower rate, which can be done right up until a few days before closing. It doesn’t matter if you have already signed the documents or not. There is the lowest rate now and then there is the lowest rate at closing. It’s the one at closing that is most important. We’re not just committed to saving you as much money as possible, but as much time as well! 

 

The Effect of Credit Score on Your Mortgage Rate  

There are many who believe that the higher the credit score the lower the rate, but this is not true. While it’s important to maintain a high credit score, it will not influence the rate you’re offered.  

You either qualify for the mortgage or you don’t.   

While having a perfect 900 credit score will give you some bragging rights, it doesn’t get you any special privileges when it comes to your mortgage rate. It doesn’t matter if your score is 700 or 900, the rate will be the same. In fact, in some situations it may be possible to get the lowest rates on the market with a score as low as 600, however, scores this low can make it challenging to qualify with an A lender. But it’s still possible, and if we can get you qualified, then it would still be at the lowest rates that lender offers.  

 

Conclusion

While these points will all lower your credit score, it’s important not to overthink it. Your credit score is not going to plummet every time you close an account, go over 50% of your limit, open a new account or when your credit is checked. The impact is generally quite minimal. The exact amount of the drop is highly dependent on your overall credit portfolio, particularly your payment history which makes up 35% over your overall score.