You consider yourself a responsible spender, yet for some reason, your credit score is not as high as you think it should be. If this sounds like you, you may be unaware of a few surprising elements that contribute to a lower score:
- Using a debit card to rent a car
This may be the most confusing reason why your score would lower. Using a debit card to rent a car seems like a financially responsible choice, as you are making sure you will not owe any money to the rental company. In general, your debit card does not affect your credit score. Yet, Equifax explained that when a rental company loans you a car, they are taking the risk that you may damage it. As a result, they want to make sure you are in a position to cover the costs of fixing it. Many rental car companies have it written in the rental agreements that if a customer uses a debit card, they have the right to pull your credit report and make sure you are a trustworthy candidate.
So why does pulling your credit report lower your score?
When a business or lender examines your credit report, it’s called an inquiry. We’ve explained in previous blogs that there are two types of inquiries: hard and soft. A soft inquiry does not affect your credit score. It occurs when you check your report yourself or when a business does so without your permission to determine if it would like to offer you its product. A hard inquiry does affect your score. It shows up on your report when a potential lender is checking out your credit score because you have applied for a loan with them. Inquiries will have a smaller effect on your score if you have many accounts and a long payment history.
In the case of renting cars, the car rental company can be considered a lender.
- Unpaid parking tickets
If you don’t pay your parking tickets, it is possible that debt could find its way onto your credit report. Some cities will send unpaid parking tickets to collection agencies, which is how the debt gets reported to the credit bureaus. According to My Money Coach, if you pay off the ticket it is generally not too difficult to get it removed from your credit report.
- Having a no-limit credit card
Daily Finance explained that no-limit credit cards make it impossible for most credit scoring models to calculate your credit utilization rate — the amount of money you spend in relation to your credit limit. According to Time, the utilization rate is the second-largest determinant of your credit score, after payment history. So, not having a utilization rate at all could negatively affect your score.
Whether or not you have a no-limit credit card, you should make sure your credit card company reports your credit limit to the three major bureaus. You may be penalized if credit card companies only have access to your balance.
- Closing a credit card account
Again, this may seem like a responsible decision, as it will encourage you to spend less money and avoid debt. Yet according to Daily Finance, closing a card results in a decrease in the amount of credit available to you. Less available credit could mean a higher utilization rate, and the lower you can keep that rate, the better your credit score will be.