A primary reason many people ruin their credit is because they aren’t familiar with their credit score or how it affects them. Your credit rating is generated by three major credit bureaus and is used by lenders to decide whether you’re worthy of a loan (and, if you get a loan, how reasonable of a rate you get). Avoiding these five easy ways to ruin your credit can have a major impact on your financial future.
5 Get in Over Your Head
The worst single thing you can do to your credit is to default on a loan or to declare bankruptcy. This means that you throw in the towel on your ability to repay a debt obligation. To a potential lender, this is not a good sign of your credit worthiness. According to a March 2010 “CNN Money” article, foreclosing on a mortgage could lead to a drop of around 200 points. Declaring bankruptcy could wipe out someone with excellent credit with a drop of as much as 400 to 500 points.
4 Pay When You Feel Like It
Your payment history is the most significant FICO factor at 35 percent. One of the most common reasons for major credit rating free falls is late payments. When you receive a bill, the “due date” isn’t a recommendation or even a request. It is a rigid deadline by which your payment is expected. Creditors submit late payment reports to the credit bureaus. Missing a payment altogether is a surefire way to incur credit complications.
3 Charge Without a Conscience
A simple yet highly effective way to severely damage your credit is to use your card without any concerns about balances or limits. “Amounts owed” accounts for 30 percent of your FICO score, and debt-to-limit ratios on cards have a major influence on this factor. Using over half your limit on a given card hurts your credit. Exceeding credit limits is an even bigger problem.
2 Closing Old Accounts
You might think closing accounts with a zero balance makes sense, but you can adversely affect your credit in a couple ways. First, you want to maintain cards that you’ve had for a long time with good payment histories. Also, each account you close reduces your total debt-to-limit ratio on all credit accounts. If you have to close accounts, it is better to close the newest cards with little history. Average length of credit history impacts 15 percent of your FICO score.
1 Get Application-Happy
Credit card providers flood residential mailboxes daily. If you have a credit card, you’re a marked man or woman for life. While those 0-percent purchase or balance-transfer offers seem enticing, don’t complete every application offer you get. “New credit” is 10 percent of your FICO credit score, according to the myFICO website. Too many applications in a 12-month period is a common reason for significant credit score drops, especially if you don’t have much credit history to begin with.