What Ruins Your Credit Score the Most?

Missing payments generally ruins your credit score more than any other everyday credit mistake. Payment history is the most important part of your credit score, so repeated late payments can cause serious damage.

The effect can become more severe when an account remains unpaid, is sent to collections or is charged off. Bankruptcy and consumer proposals are also major negative events that can affect your credit for years.

High credit card balances, frequent applications and closing older accounts may lower your score as well, but they do not usually carry the same weight as a pattern of missed payments.

1. Missing or Making Late Payments

Your payment history shows whether you repay borrowed money as agreed. According to the Financial Consumer Agency of Canada, it is the most important part of your credit score.

A late payment may hurt your credit because it suggests that you are having difficulty managing your financial obligations. The effect may depend on:

• How late the payment becomes

• How much money is overdue

• How recently the payment was missed

• How often you have missed payments

• Whether the account eventually enters collections

One isolated late payment may not have the same effect as several accounts that are repeatedly overdue. In general, the longer an account remains unpaid, the more serious the situation becomes.

Late payments may remain on a Canadian credit report for up to six years, depending on the credit bureau and the type of account. Their effect may gradually decrease as they age, but they do not disappear as soon as you resume making payments.

Always make at least the minimum required payment by the due date. Paying the full balance is preferable when possible because it can also help you avoid interest.

2. Allowing an Account to Go to Collections

An account may be sent to a collection agency after it remains unpaid for an extended period.

Collections are particularly damaging because they show that the original lender was unable to recover the debt through its normal payment process. The Government of Canada states that your credit score will go down once a creditor sends your debt to a collection agency.

A collection account may make it more difficult to:

• Qualify for a credit card or loan

• Receive a competitive interest rate

• Rent a home

• Obtain certain services without a deposit

Paying the collection is generally better than continuing to leave it unpaid, but payment does not automatically remove it from your credit report. The account may instead be updated to show a zero balance or paid status.

Before paying, confirm that the debt belongs to you, ask for the amount in writing and keep proof of the payment.

3. Defaulting or Having Debt Charged Off

A default occurs when you fail to meet the repayment terms of a credit agreement. A lender may eventually charge off the debt when it determines that the account is unlikely to be repaid through its regular collection process.

A charge-off does not mean the debt has been forgiven. The lender may continue trying to collect it, sell it to a collection agency or take legal action where permitted.

The unpaid history and charge-off status can remain on your credit report even after you pay the debt. Equifax notes that a paid charge-off or collection may remain on a report during the applicable reporting period, although paying it may reduce its negative effect under some scoring models.

Contact the lender as soon as you realize you cannot make a payment. Arranging an alternative before the account defaults is generally better than ignoring the debt.

4. Filing a Bankruptcy or Consumer Proposal

Bankruptcy and consumer proposals are among the most serious events that can appear on a credit report.

A bankruptcy is a legal process that may discharge certain debts when you are unable to repay them. A consumer proposal is a formal arrangement in which you offer to repay part or all of what you owe over an agreed period.

Both indicate that you were unable to repay your debts under their original terms. They can remain on your credit report for several years, with the exact timeline depending on the type of filing, whether it is a first or subsequent filing, the credit bureau and applicable provincial rules.

However, avoiding professional debt help solely to protect your score can make a serious financial problem worse. Speak with a Licensed Insolvency Trustee or reputable credit counsellor when you cannot keep up with your debts.

Simply speaking with a credit counsellor does not affect your credit score.

5. Maxing Out Your Credit Cards

Using a large percentage of your available revolving credit can lower your score even when you make every payment on time.

Credit utilization compares your reported credit card and line-of-credit balances with your available limits.

For example, if you owe $4,500 across credit cards with a combined limit of $5,000, your utilization is 90%. A lender may interpret this as a sign that you rely heavily on borrowed money.

The Financial Consumer Agency of Canada recommends trying to use less than 30% of your total available credit. It also notes that high utilization may affect your credit even when you pay your balance in full each month.

High utilization can often be corrected faster than a missed payment. Your score may respond after the lender reports a lower balance to the credit bureaus.

To reduce utilization:

• Pay down balances before applying for new credit

• Avoid going over your limit

• Make more than one payment during the month

• Keep spending low after making a large repayment

• Avoid closing unused cards without considering the effect

You do not need to carry a balance or pay interest to build credit.

6. Applying for Too Much Credit at Once

Applying for a credit card or loan may result in a hard inquiry on your credit report.

One occasional application is normal. However, several applications within a short period may make lenders think you are urgently seeking money or taking on more debt than you can manage.

Hard inquiries may have a smaller effect than missed payments or collections, but repeated applications can add unnecessary damage, particularly when your credit history is new or already weak.

Only apply when:

• You need the credit product

• You understand its fees and interest rate

• You have a reasonable chance of approval

• The payments will fit your budget

Checking your own credit report is a soft inquiry and does not lower your credit score.

7. Closing an Older Credit Card

Closing a credit card does not usually cause the same level of damage as missing payments, but it may affect two parts of your credit profile.

First, closing the account reduces your total available credit. This can increase your utilization percentage.

Suppose you owe $1,000 across two cards with a combined limit of $10,000. Your utilization is 10%. If you close an unused card with a $5,000 limit, you would then owe $1,000 against $5,000 of available credit, increasing your utilization to 20%.

Second, closing an older account may eventually affect the length of the credit history shown on your report.

The Government of Canada recommends considering whether an older account can remain open when it has no annual fee, is easy to manage and does not encourage overspending.

Closing a card may still make sense when it has a high fee or creates a serious risk of additional debt.

8. Ignoring Errors or Fraud on Your Credit Report

An unfamiliar account, incorrect late payment or inaccurate balance may lower your credit score even though you did nothing wrong.

Review your reports from both Equifax and TransUnion because the information may differ. Look for:

• Accounts you did not open

• Payments incorrectly marked late

• Balances that have already been paid

• Duplicate collection accounts

• Incorrect credit limits

• Negative information that has remained too long

Canadian credit bureaus must investigate disputed information and correct confirmed errors for free. Contact the lender as well as the credit bureau, and keep statements or receipts that support your dispute.

Accurate negative information generally cannot be removed simply because it is lowering your score.

Can One Missed Payment Ruin Your Credit?

One missed payment can hurt your credit, but it does not necessarily ruin it permanently.

The effect depends on the rest of your credit history. Someone with a long record of on-time payments may experience a different result from someone who already has several overdue accounts.

Act quickly when you miss a due date:

1. Make the payment as soon as possible.

2. Contact the lender and explain what happened.

3. Ask whether the payment has been reported.

4. Set up automatic minimum payments.

5. Continue paying every other account on time.

Paying quickly may prevent additional interest, fees and more serious delinquency. However, the lender is not required to remove accurate information after it has been reported.

What Does Not Usually Ruin Your Credit Score?

Several financial events do not directly lower your credit score because they are not normally part of your credit report.

These generally include:

• Checking your own credit report

• Using a debit or prepaid card

• Receiving a lower salary

• Losing your job

• Getting married or divorced

• Paying your credit card balance in full

• Being denied credit

These events can indirectly make credit management more difficult. For example, losing income may make it harder to make payments, but the income change itself does not normally appear as a negative credit item.

How to Avoid Serious Credit Damage

The most effective protection is to prevent missed payments from becoming a pattern.

Set automatic payments for at least the minimum amount and keep enough money in the payment account. Contact your lender before the due date when you believe you will have difficulty paying.

You should also:

• Keep credit utilization below 30% when possible

• Avoid applying for several accounts together

• Review both credit reports regularly

• Address overdue debt before it enters collections

• Keep suitable older accounts open

• Report unfamiliar accounts or fraud immediately

Do not skip a payment because you are disputing a purchase. Continue making the required payments while the lender investigates the charge.

Protect Your Payment History First

Repeated missed payments cause some of the most serious everyday damage to a credit score because payment history carries significant importance. The damage can become worse when an account defaults, enters collections or becomes part of an insolvency filing.

High balances and frequent applications also matter, but they are often easier to recover from than a long pattern of unpaid accounts.

When money is limited, prioritize making at least the minimum payment on every account. Preventing another missed payment is usually more important than trying to make one account look perfect.