Seven Things That Ruin Your Credit Score
Your credit score grades how you handle credit. Lenders gauge your risk of default and credit worthiness by this score. A high score affords greater access to car loans and leases, mortgages and better interest rates. Learn what will ruin your credit score below.
7 Ways You Can Ruin Your Credit Score
Below are several things that can lower your credit score. Some will seem obvious, while others may puzzle you.
1. Poor Payment Record Can Ruin Your Credit Score
Whether and how you pay counts for 35 percent of your FICO score. Payment history represents the largest part of your credit score.
Delinquent payments appear on your credit report beginning 30 days after the due date. When you’re 180 days behind, the creditor “charges off” the account. In this designation, the creditor declares it has finished expecting payment from you. These “charge-offs” and referrals to collection agencies remain on your report for seven years. Your creditor may send the account to collections before or after charging it off.
Missed or late payment information doesn’t come solely from credit card companies. Your landlord, the library, a medical provider, car lender and mortgage company also report delinquencies or defaults.
2. Overusing Credit Cards Can Ruin Your Credit Score
Thirty percent of your credit score turns on “credit utilization.” This shows the ratio of your balances, or what you owe, on revolving credit accounts to your total credit limit. For instance, you owe a total of $3,000 on credit accounts. The sum of your limits stands at $10,000. In this scenario, you have a credit utilization rate of 30 percent. Normally, this figure should not go north of 30 percent.
When you deplete your cards’ credit limits, you naturally will carry high balances and little credit to use. High utilization ratios signal to lenders or other credit grantors that you’re relying too much on credit. Such over-extension can serve as a symptom of failing financial health.
3. Closing Certain Credit Cards Can Ruin Your Credit Score
Understandably, closing cards may remove the temptation to run balances. You may treat closing your card as a mark of your financial discipline.
However, indiscriminate closing could cost you credit score points. With a closed account comes the lost available credit. If that card has a balance, your credit utilization ratio rises. Keep open even barely-used credit cards with nothing owed on them. By closing zero-balance accounts, you lose all of that credit ceiling and the ability to suppress the utilization ratio. Close credit card accounts correctly to lessen the impact to your credit score.
High-limit cards with low or zero-balances likely have age on them. Thus, you delete valuable credit history by closing them. With a lower average age of accounts, you appear to not have as long or good a track record with credit. FICO bases 15 percent of your credit grade on the length of time you’ve held credit.
4. Opening New Accounts Can Ruin Your Credit Score
Along with closing the old, new accounts lower the average age of credit accounts.
When you open or apply for new accounts, you generate credit inquiries. That is, lenders or creditors pull your credit report to decide whether to grant credit. A handful of inquiries in a short time window tells creditors you’re increasing reliance on credit.
Inquiries should not dissuade you from shopping for interest rates. On car loans, mortgages and student loans, you’ll likely apply multiple times to find the best rates. FICO recognizes generally you shouldn’t be penalized for shopping. As a result, it doesn’t rely on car loan, mortgage or student loan applications within 30 days of scoring.
5. Dormant Credit Cards Can Ruin Your Credit Score
It seems counter-intuitive that not using credit could hurt your score. Improve your credit score by using credit cards.
If your credit card agreement so provides, inactivity results in banks closing accounts. Depending on the card company, the period could run six months without use. Inactivity-based closure extinguishes available credit and pushes your credit utilization rate upward.
Thus, some minor purchases on your accounts may actually keep credit scores from dropping. You might save these for older, low-balance cards to take advantage of the credit limits.
6. When a Marriage Dissolves It Can Ruin Your Credit Score
Divorces and separations trigger events that can lower credit scores. Joint accounts are closed, resulting in loss of credit limits. Applying for several individual ones means credit inquiries.
Also unbeknownst to one spouse, the other may continue to spend with a joint account or as an authorized user. As to the latter, you can have the authorized designation for that spouse removed. Otherwise, you bear all of the legal obligations and hits to your score for the other spouse’s use.
Missed payments, whether intentional or due to oversight, constitute a credit score risk when you split. Proper divorce planning is a way in which you can protect your assets.
When you maintain separate credit accounts in marriage, you protect your score and property. In most states, spouses own land as “tenants by the entirety.” This means one spouse cannot encumber the property without the other spouse.
7. Answering For Another’s Debt Can Ruin Your Credit Score
Lenders may want your name on a loan for a family member or your business.
Co-signing on a loan or guaranteeing another’s obligations could drop your score. Furthermore, your credit report will show the obligation as your own. If the primary borrower defaults, the creditor can look to you for repayment or collection. In other words, you get treated as if you have defaulted unless you repay the loan.
You don’t want to ruin your credit score. While high credit scores are important, take stock of your financial condition. Treat low credit scores as perhaps a clue you may have serious money issues. Lastly, addressing them may keep you from worse consequences than a low credit score.