3 simple things that can destroy your credit score

As a small-business owner who happens to travel the globe, Trish Sare is always looking for deals. The founder of BikeHike Adventures, a Vancouver-based tour company for the physically active, she’s the first to admit she used to be a sucker for all the promos and bonuses offered by credit card companies to get people to sign up.

“I used to apply for credit cards that offered deals all the time,” Sare says. “I never had any intention of using the card; I just wanted the deal. Then I found out that doing that wasn’t good for my credit score.”

Too many credit cards

It could be a whack of air miles, a gift certificate or a store credit: lenders are doling out all types of perks to lure new applicants. Having too many credit cards in your wallet can harm your credit score, though.

Transunion Canada and Equifax Canada — the two credit reporting agencies in this country — assume that if you’ve opened several new accounts recently, you’re planning on making several purchases and taking on a lot of debt, meaning you could be a greater credit risk.

“There are lots of incentives out there in the marketplace to entice consumers to open up credit products at additional institutions; it’s credit candy,” says Paul Le Fevre, director of operations for credit bureau Equifax Canada.

“But ultimately that has an impact on the credit score. If the consumer is in a position where they’ve got an additional $10,000 worth of debt because they’ve amassed five credit products at $2,000 each, they’re impacting their debt ratio.”

Even if you have no plans on using a card once you’ve scored the bonus, a large collection of plastic can still be a problem.

“Credit scores don’t get produced based on the intent of the consumers,” Le Fevre says. “It’s on the actual potential debt load and risk to the credit grantors. The more potential debt the consumer can get with credit products, the higher the risk.

“If I’m applying at 17 different retail places for credit cards, that can have a negative impact from a scoring perspective.”

Miss a payment

Of all the things that can affect your credit score, missing a payment is the most damaging. That’s because payment history accounts for 35 per cent of a score. And the later you make a payment, the worse it is for your credit health.

“Payment history is a key driver in the score,” Le Fevre says. “It’s not only about the actual products you have but how you manage those products. You need to ensure all your payments are on time without exception.”

Once you make a payment, you need to be acutely aware of exactly how much you’re charging and what your credit limit is. Not doing so could get you into trouble.

Over-limit spending

Let’s say you make a payment of $500 on a card with a balance of $5,000 but then you go right back out and use it.

“If you go to the bank to pay off $500 then leave the bank, run to the mall, and put $500 back on or you go and put $600 on,” Le Fevre says. “Now you’re going over your limit, and you’re over your 100-per cent utilization from a scoring perspective.”

“The closer you get to 100, the more negative impact on your score,” Le Fevre adds, noting that credit utilization accounts for 30 per cent of a score. “Once you go over that, it has a significant negative impact on a score. Not only that but you may be paying $30 or $50 for an over-limit per-transaction fee.”

Other factors used to calculate a credit score are:

• length of credit (15 per cent)

• credit mix (10 per cent)

• inquiries (7 to 10 per cent).

The best thing you can do for your score is to pay debt down or off completely. Credit grantors want to see you have a mix of credit and that you can use it responsibly. A score is important because it will affect the type and amount of credit grantors are willing to provide you in the future. If one day you want to apply for a mortgage, a strong credit history will help make it happen.

If you’re making efforts to improve a credit score, keep in mind it takes time.

“If you have outstanding debt, get that utilization down and pay down your outstanding balances overtime,” Le Fevre says. “If you decide on a Monday to get your credit score up it won’t be fixed by Friday.”