Three Moves that Can Lower Your Credit Score

SEP 07, 2011

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So youre committed to improving your credit score, and thats a good thing. Unfortunately, some credit moves that you think might make sense can actually be moves that lower your credit score.

Here are three seemingly positive credit moves that could actually hurt your credit score:

1. Settling an unpaid debt

Seems like settling a debt would be better than defaulting on it, right? And if you have to choose between defaulting and settling, wed agree that settling is the lesser of two evils. But dont trust advertisements that make it sound like debt settlement will also solve all your credit woes. Settling a debt which entails the creditor agreeing to accept payment that is less than what you actually owe can still adversely affect your credit. Its just less damaging than default or bankruptcy.

2. Transferring balances

New credit card offers tempt you with the promise of 1.9 percent interest for six to 12 months, giving you a chance to pay off the transferred balance without playing all that interest. Think of the interest savings over the life of the debt! But while you have stars or dollar signs in your eyes over this great deal, keep in mind that transferring a balance from one credit card to a new card is a move that can lower your credit score.

Opening a new account and moving balances around can impact two of the key factors credit bureaus use to calculate your credit score your credit utilization ratio and hard inquiries. The new credit account will be recorded as an inquiry on your credit report, which can result in a lower score. And moving a balance from a high-limit card to a new lower-limit card can make it look like youve maxed out that card. Make sure you weigh out the pros and cons, before you make the decision to do a balance transfer to a new credit card.

3. Living debt free

Most of us fall into one of two schools of thought about debt. We either assume it will be a way of life for us, or we believe that all debt is bad. Debts that build your financial well-being, that leave you with something to show for what youve paid, like a house or car, can actually be good, credit-building debt. The tricky truth about good credit is that in order to build it, you have to incur and pay off debts. If you have no credit cards, no mortgage and no car loan, theres nothing for the credit bureaus to report and score. If you care about your credit score, making wise use of credit and paying your debts responsibly will be a better credit move than having no debt at all.