Many of us are working to build our credit scores, but what is often overlooked are the actions you take that ding your score, even if you were doing something you thought was positive.

The good news is that many of our actions that reduce our credit scores are temporary and will bounce back with a little time.  Below are some good examples of events that will change your scores and should be avoided if you are trying to purchase a home.

#1  You applied for a new credit card

Card issuers pull your credit report when you apply for a new credit card because they use your credit scores to calculate risk before giving you a line of credit. This credit check is called a hard inquiry, or “hard pull,” and temporarily lowers your credit score a few points. Hard inquiries remain on your credit report for two years, but FICO (Fair Isaac Company) only considers inquiries from the last 12 months when calculating your credit score.

Hard inquiries on your credit report aren’t necessarily all bad.  After all, applying for credit cards is a great first step in building credit. When you use credit cards correctly — by charging purchases and paying them off in full by the due date — they can help increase your credit score. Hard inquiries in moderation are not going to hurt you in the long run.

You do get a double whammy when you a credit card company creates a hard inquiry and when you receive that new piece of unsecured credit.  That is why you need to do this only when it makes economic sense.

#2  You charged a large purchase onto your credit card

Credit cards are convenient for making large purchases because you don’t need to pay all the money upfront, but leaving a high balance on your card will report a higher credit utilization rate to the credit bureaus.  High credit utilization is 30% of your credit score, so you need to pay close attention to this category.

Your utilization rate, or how much credit you use (balance) compared to much you have available (credit line). You want to aim for a low utilization rate because using too much of your available credit limit shows that you pose a financial risk to issuers. Experts recommend keeping your credit utilization below 30% to get the best credit score.

Carrying a high balance on your credit card is not only bad for your credit utilization rate, but it will also incur a whole lot of interest.

#3  You missed a credit card payment

Your payment history is the most important factor that determines your credit score (making up 35% of your FICO score calculation), missing a credit card payment will have an immediate and a lasting negative effect on your score. Mortgage Lenders care a lot about whether you’ve paid your past credit accounts on time because they indicate your risk.  Past performance predicts future behavior!

According to MyFico.com, a 30-day missed payment can drop a fair credit score anywhere from 17 to 37 points and a very good or excellent credit score to drop 63 to 83 points. But a longer, 90-day missed payment drops the same fair score 27 to 47 points and drops the excellent score as much as 113 to 133 points. In other words, the higher your credit score, the greater the negative effect will be.

How quickly your score bounces back after a missed payment varies depending on your payment and length of credit history. Time is the only thing that will heal a credit score from a late payment.  As you get further away from the late payment your scores will start improving.  A history of on-time payments is vital to a good credit score.

#4  You paid off a loan

While paying off your credit card debt can increase your credit score, paying off installment debt, such as a mortgage or a student loan, has the opposite effect. In the short-term (0-90 days), paying off an installment loan like a car loan will not have much effect.  After that your credit score can fall because it means having one less credit account in your name.

If you have plenty of other open creditors, don’t let this prevent you from paying off your loans. Being debt-free will help your overall financial health, and it makes no sense to pay unnecessary interest charges over time just to save a few credit score points.

#5  You closed your credit card

Closing a credit card account, especially your oldest one, hurts your credit score because it brings down the overall average age of your accounts. The length of your credit history makes up 15% of your FICO score. The longer you can show you have had credit, the better for your credit score.

Don’t let poor credit stand in the way of achieving your dreams. Credit reports and credit scores don’t have to be a mystery – check out the education page on myFICO.com.

For more than 25 years, FICO^® Scores have been the industry standard in helping millions of people buy homes and cars, rent an apartment, get a credit card, and receive better interest rates. With over 90% of lending institutions using FICO^® Scores, myFICO.com is your one-stop credit education solution for answering questions and understanding your FICO^® Scores and credit reports.

Join one of our education classes and learn more about credit in the mortgage lending industry, register by clicking here!