This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.
As the room filled with bubbles, I realized I’d made a grave mistake.
I was 10, and my brother and I had just finished loading the dishwasher. We put all the dirty plates inside before realizing my mom was out of powdered Cascade dishwasher detergent. All we had was a bottle of Dawn dish soap — which, surely, we thought, would work the same?
Spoiler: It didn't. Within minutes, the kitchen was flooded. No matter how many towels we fetched in panic, we couldn’t keep it under control. We had royally screwed up.
It was an important lesson for Little Julia to learn about unintended consequences: Sometimes you do something you think is OK — helpful, even — and it ends up hurting you. In personal finance, one of the clearest examples of this delicate cause-and-effect involves credit scores, which are extremely sensitive.
Is it possible to accidentally make my credit score drop?
Monique White, head of community at Self Financial, began by recapping the basics. Credit scores are calculated based on a mix of factors. The biggest FICO Score category is payment history (which makes up 35% of the data considered for my score), followed by amounts owed (30%).
That’s why the general advice is to always pay your credit card bills on time, in full, every month.
But there are lesser-known factors that can impact a credit score, too. One mistake I might make, according to White, is closing an old credit card. I might think, “Oh, well, the rewards kinda suck on this Discover I got in high school, so I should just get rid of it” — but in reality, it can impact my credit history. Credit history length makes up 15% of my score.
Of course, if that old card is costing me a ton in annual fees and truly doesn’t fit with my lifestyle anymore, White says to go ahead and shut it down. But if I can keep it open, I should, perhaps by putting something small like my Disney+ subscription on it and paying the bill every month “so you’re not affected by that closure.”
Speaking of bills, White says another common credit error is to only make the minimum payment when I have a balance. Some scoring models heavily weight what’s called my credit utilization rate, which is the amount of credit I’m using in proportion to all the credit I have available across cards. Ideally, my credit utilization rate should be under 30% (some experts say even less than that).
Say I have $10,000 of available credit, and one month I use $5,000 of it. My two cards only require minimum payments of $500 each, so that’s what I pay.
I may think I’m free and clear because I’m meeting the requirements — but in reality, I've only paid down my balance to $4,000. My credit utilization rate is 40%, which is over the recommended amount… and I’m likely paying interest on top of that.
“You could make all your payments on time and think you have perfect credit because you never miss, but then you check your credit score and it's lower than what you expected,” says John Ulzheimer, a credit expert who formerly worked at FICO and Equifax.
The fix? If it fits in my budget, I may want to make an extra payment so I can get my utilization rate back under that 30% threshold and avoid dinging my score.
Confusingly, though, debt isn’t always a bad thing. Like, I might think paying off what I owe is good (and it typically is), but it can also sink my score because paying off a debt sometimes means closing the account it was under. And while it's tempting to try to dispute/argue with the credit bureaus to get these so-called "satisfied obligations" removed from my report, Ulzheimer says that can be a trap.
“It can hurt your credit because scoring systems reward you for that positive history,” he adds. “You can not only make your [file] look thinner but also younger and less diverse. That’s three bad things as it pertains to scoring.”
The bottom line
There are several ways I can accidentally sink my credit score, including closing old cards, only making minimum payments, trying to get paid debts removed from my report and more.
One of the simplest errors I can make, though, is not being on top of things at all. White says I should regularly pull my credit report to run through the basics: Is my name spelled right? Is my address correct? Do I recognize everything on there?
“We need [credit] for not only major milestone purchases like a house but for everyday items like renting a car, applying for an apartment, trying to get a phone line,” she adds. “It’s really important that you focus on your credit so you can increase your score.”