5 Things That Can Destroy Your Credit Score
Your credit score is a gatekeeper. It can make or break your chances of getting the best rate on a loan and in some cases it can even affect whether you get a job. The better your credit score, the more money you can keep in your pocket. And who couldn’t use a little extra cash? FINRA puts it best with this example:
“Suppose you want to borrow $200,000 in the form of a fixed-rate 30-year mortgage. If your credit score is in the highest category, 760 to 850, a lender might charge you 3.307% interest for the loan. This means a monthly payment of $877. If, however, your credit score is in a lower range, 620 to 639 for example, lenders might charge you 4.869%, which would result in a $1,061 monthly payment. Although quite respectable, the lower credit score would cost you $184 a month more for your mortgage. Over the life of the loan, you would be paying $66,343 more than if you had the best credit score. Think about what you could do with that extra $184 per month.”
It is in your best interest to do everything you can to keep your score as high as possible. Be aware of things that may cause your three digits to take a downward spiral. Here are five situations that could trash your credit score.
1. Not correcting credit report errors
Don’t ignore errors in your credit report; they won’t fix themselves. Depending on the severity of the reporting error, you could lose hundreds of points from your credit score. A foreclosure, for example, could cost you up to 160 points. Don’t pay the price for someone else’s missteps. And you have no excuse when it comes to ordering your credit report. Thanks to the Fair Credit Reporting Act, consumers are entitled to one free report from each of the three major credit reporting agencies (Experian, Equifax, and TransUnion) every 12 months. As soon as you see something awry in your credit report, alert all three agencies as soon as possible.
2. Tardy payments
Paying in full won’t make much of a difference if your payment is late. Your credit payment history accounts for 35% of your FICO score. So if you are chronically late with payments, this will impact you greatly. Know that if you make a payment that is more than 30 days past due, your creditor can report the lateness to the credit reporting agencies.
“The longer a bill goes unpaid, the more damaging the effect it has on your credit score. For example, all other things being equal, a payment that is 90 days late can have a more significant negative impact on your credit score than a payment that is 30 days late. In addition, the more recent the late payment, the more negative of an impact it could have. One late payment could have a more significant impact on higher credit scores. According to FICO data, a 30-day delinquency could cause as much as a 90- to 110-point drop on a FICO Score of 780 for a consumer who has never missed a payment on any credit account,” said Experian.
And making matters worse, this negative mark will stay on your credit report for up to seven years. If you know that you won’t be able to pay on time, let your creditors know immediately.
3. Maxing out credit cards
Your credit card is not your own personal piggy bank. Eventually, you’ll have to pay those debts back. So don’t treat your plastic like a bottomless money pot, because it’s not. When you stretch your credit limits to the max, you’re negatively affecting your credit utilization rate. This measures your total amount of available credit compared to your balances.
“Credit utilization rate has proven to be extremely predictive of future repayment risk. So it is often an important factor in a person’s score. Generally speaking, the higher your utilization rate is, the greater is the risk that you will default on a credit account within the next two years,” said myFICO.
Generally it is recommended to keep your credit utilization below 10% of your available credit. The amounts owed on your accounts determine 30% of your FICO score, so this is the second biggest factor when it comes to credit.
4. Charged off accounts
Some credit card holders get into financial trouble and decide not to pay their bill at all. This can result in having a charged-off account listed on your credit report. A creditor will usually charge off an account after determining a debt has a low chance of being collected. This is usually after six months of non-payment. If a charge off appears on your credit report, you can pretty much guarantee your credit score will be negatively affected. In addition, the charge off will stay on your credit report for seven years. Depending on your credit situation, you might be able to improve your score by paying off your account, say the experts at Experian. Although this will not improve your score right away, it can help raise your score over time.
5. Filing for bankruptcy
If you’ve hit a financial rough spot, you might be considering bankruptcy. However, this option should be your last resort. A bankruptcy could be very bad news for your credit score. This is because a bankruptcy filing could reduce your credit score by as much as 240 points. And depending on the type of bankruptcy you file, this negative mark could remain on your report for as long as 10 years.