The Franchise Forum

Expert financial advice, content, and strategies for your franchise business

Common ways people unwittingly damage their credit score

To successfully take out a loan as you start up your franchise business, you need to have a solid credit score that shows you are a low-risk investment. However, for many people who are unfamiliar with how credit scores are calculated, some actions they take with the intent of improving their score could actually be damaging.

Here are a few actions that you might be surprised to learn could be doing you more harm than good:

Canceling credit cards.

Whether you are canceling the cards to avoid temptation or you simply do not use a certain card anymore, you are likely only hurting your credit score by doing so. One factor in determining your credit score is “credit utilization ratio,” which indicates what percentage of your overall available credit balance you are using. Generally, you want a lower number. But if you cancel one of your credit cards, suddenly your available credit balance goes down, but your amount used stays the same, which increases that percentage and ultimately lowers your score.

"A study by the FTC showed that nearly 42 million people have seen errors on their credit report"

Not taking out multiple types of credit.

Lenders want to see a diversified credit portfolio to know you are able to handle your payments. This isn’t to say that you should go out and take out a whole bunch of credit cards just to satisfy your lenders — that could also damage your credit score. However, having a couple credit cards and an existing loan or two (auto, mortgage) can give your lenders a good indication of your reliability.

Not reading your credit report.

Most people never check their credit report unless they know they’re about to take out a major loan. Even then, you’d be surprised at how many people apply for the loan without ever glancing at the report. However, looking at the report gives you the chance to search for any potential errors.

A study by the FTC showed that nearly 42 million people have seen errors on their credit report. Of those, five percent saw a jump of at least 25 points in their credit score after those errors were corrected. That could be the difference between loan application acceptance and denial.

So while you might previously have thought analyzing your report was unnecessary, the reality is that it is imperative that you do it.

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