5 Bad Moves That Will Torpedo Your Credit Score
Your credit score is
the gateway to your borrowing ability and how cheaply you can get
loans, and so you want it to be as high as possible. If you boast a
credit score of 750 or more, you are going to pay the lowest interest
rate being offered on most loans and credit cards. But if your credit
score is 650 or lower, you will get hit with a lot of fees and higher interest-rate charges,
if you get approval for credit at all. Because most Americans don’t
have a huge sum of money to pay for a house, buy a new car or even send
their child to college, keeping your credit score intact is the best way
to avoid overpaying when borrowing. Far too often people make mistakes
that can hurt their credit score for as long as seven years. From
missing payments to foreclosing on your home, here’s a look at five bad
moves that will torpedo your credit score.
Make Late Payments or Miss Them Altogether
One of the simplest things to avoid that can have a big impact on
your credit score is missing payments on your credit cards, mortgage,
student loans or any other secured or unsecured debt. (Read More In “How Credit Card Delinquency Works.”)
That’s because one of the things the credit-scoring agencies look at
when determining a credit score is your payment history. Missing a
payment here or there is no big deal, but if you have a lot of late or
missed payments over a long period of time, your credit score will be
hurt big time. Even paying just the minimum each month is better than
being late with your payments.
Carrying Too High Credit-Card Balances
In addition to your payment history, a big part of determining your
credit score comes from the amount of current debt you have. (Read More
In “3 Important Credit Score Factors”.)
Known as credit utilization, it is the ratio of credit-card balances
to credit-card limits. The lower your credit utilization is, the better
your credit score will be because it demonstrates you have self-control.
Sure you may have $10,000 available in credit, but if you used only
$1,000 of it, you will look good in the eyes of lenders. If your credit
cards are maxed out, then your credit utilization will be 100%, which
doesn’t bode well for a high credit score.
Your Account Goes Into Charged-Off Status
Missing payments in and of itself will hurt your credit score, but do
it too often and the status of that particular credit card could go
into charged-off status,
which means that while you still have to pay back your debt, you aren’t
allowed to make purchases on the credit card. Typically an account is
charged off after 180 days of non-payment and will remain on your credit
report for seven years.
An Account Is in Collections
Just because you ignore the bills in the mail and the telephone calls
from your creditors doesn’t mean they will miraculously go away. While
ignoring it may buy you some time, at least in your mind, wait too long
to deal with a bill and it will end up in collections. Many companies
enlist third-party collection agencies to recover past-due debts for
them. (Read More In “How The Debt Collection Agency Business Works.”)
If your account ends up in collections and you do nothing about, your
credit score will fall. Having an account reported as in collections can
result in a substantial reduction in your credit score. For people who
have high credit scores to begin with, the number of points you stand to
lose will be more than someone with a low credit score.
You Foreclosed on Your Home
The housing bubble and
subsequent bust of a few years ago left many people with underwater
mortgages and big monthly payments they couldn’t afford. The result: a
period of record foreclosures that torpedoed many American’s credit
score. And although many people were in the same boat, that didn’t
prevent their credit scores from taking a big hit from a foreclosure.
Not to mention the foreclosure will stay on your credit score for seven
years, although the impact does lessen with time. As soon as you start
having trouble making your mortgage payments, it’s a good idea to
contact your lender to see what options are available to you. Although a
foreclosure won’t ruin your credit score forever, it will have a
negative impact in the medium term.
The Bottom Line
Having a high credit score means
you don’t have to overpay when you borrow. But a credit score can
easily change if you aren’t careful. Making some big mistakes such as
being late or missing payments, letting an account become classified as a
charge off or ending up in collections and foreclosing on your home are
all ways for a good credit score to quickly become a bad one.
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