Your credit score lets lenders know your level of financial responsibility. It’s often one of the first things lenders look at before they decide if you are a good risk. If your score doesn’t meet their minimum requirement, chances are they will not move forward with your loan application.
Understanding the top 10 things that can hurt your score can help you determine how to make the most of your credit.
Making Late Payments
Your credit score is made up of a variety of factors, each of which has a different weight. Your payment history, though, makes up the largest factor as it accounts for 35% of your score. If you make your payments late, it can damage your credit score more than many other factors.
Keep in mind, though, that a late payment is one that is more than 30 days late. If you miss your due date, but it’s only a few days, it won’t affect your score. Once you hit that 30-day mark, though, the credit bureaus know about it and they record it on your credit report, affecting your score.
Using too Much of Your Credit
Just because a creditor gives you a credit line doesn’t mean you should max it out. Instead, you should use financial responsibility and only charge what you can afford to pay off each month. Your credit utilization makes up 30% of your credit score.
Just how much of your credit line can you use? Generally, lenders prefer if you have no more than 20% of your available balance outstanding at any one time. If you do charge more than 20% of your available credit, do your best to pay it off right away so that it doesn’t affect your score.
Too Many Inquiries Hurts Your Credit Score
Every time you apply for new credit, lenders create an inquiry on your credit report. This hard inquiry lets other lenders know that you are trying to get new credit. Lenders need to see these inquiries in order to have a clear picture of your outstanding debts. New accounts don’t always show up on your credit report right away – it can take as long as 60 days for them to appear.
Inquiries only knock off 5 points off your credit score, but if you have a lot of them at one time, it can damage your score. Rather than applying for any new credit that catches your eye, be selective and only apply for those loans that you absolutely need.
Closing a Credit Card
You might think you are doing the responsible thing by closing a credit card, but it could hurt your score in the end. This is especially true if you have outstanding balances on your credit cards. Closing an account increases your credit utilization rate because you now have less available credit but the same amount of outstanding debt. If you don’t want a credit card anymore, just put it away, but keep the account open to keep your utilization rate the same.
Cosigning on a Loan
Cosigning on a loan might seem like the noble thing to do. In many cases, it works out just fine. But in those other cases when the borrower defaults, it affects your credit score. You are just as responsible for the debt as the person you cosign on the loan for and if they don’t pay it you are responsible. Not only that, but your credit score may drop if they make late payments or default on the loan entirely.
Letting Accounts go to Collections
If you stop paying a bill or bills and the creditor sends the account to a collection agency, your credit score will likely drop. Having an account with a collection agency shows lenders that you are financially irresponsible. What’s worse is that the account stays on your credit report for at least seven years. It may not affect your score for that long as it usually has the greatest effect during the first few years, but it might hurt you in other ways, such as lenders not approving your loan request.
Filing for Bankruptcy
Bankruptcy is there to help you when you just can’t go on financially any longer. You should know that it greatly impacts your credit score in a bad way, though. Depending on the type of BK you file (Chapter 7 or Chapter 13), your score could drop dramatically. Chapter 7 bankruptcies usually have the greatest impact because you write off your debts rather than set up a payment plan as you do with a Chapter 13 bankruptcy.
Losing a House in Foreclosure
If you stop making your mortgage payments, lenders will take possession of your home in a foreclosure. Not only will you lose your home, but your credit score will likely drop quite a bit because of it. Not only do you have late payments as a result of the foreclosure, but you have a repossession of your home, which is like a double hit to your score.
Not Having a Good Mix of Credit
Your credit score is also affected by your credit mix. It only makes up 10% of your score, but it’s still a part of it. You should have a mix of revolving credit and installment loans for the best impact on your credit score. If you have all revolving debt and no other credit accounts for the credit bureaus to score, it could make your score drop.
Errors on your Credit Report
Human error occurs all of the time on credit reports. If you aren’t aware of the errors, they could drag your credit score down lower than it should be. Rather than letting that happen, make sure you pull your credit report at least once a year to make sure everything is accurate and that your score is an accurate picture of your financial health.
These mistakes could damage your credit score by a few points or a few hundred points depending on the factor. Try to stay on top of your credit by making sure it’s accurate; pay your bills on time; don’t overextend yourself; and make good financial decisions. If something does happen to your score, pick up the pieces and try to fix things. It won’t happen overnight, but with regular good habits, you may be able to increase your score once again.