When you hear the words, credit score killers, something like bankruptcy might come to mind. While it is true that declaring bankruptcy will cause your credit to take a hit, there are plenty of things that seriously jeopardize your credit rating. We’ll show you a list of things that you should avoid if at all possible in order to have the best score you can.
Why is credit so important?
Your credit score is a very important part of your financial wellbeing. It is the numerical value that lenders and creditors use to evaluate whether or not to extend you credit. The higher your credit score, you’ll have more opportunity to acquire loans and at lower interest rates. Have a low score? Your options in life are certainly more limited and you’ll pay potentially hundreds of thousands more in interest. You score is important for things like getting a credit card, buying a car or home, renting an apartment or even getting a cell phone contract. It is important to not only understand how to build and maintain your credit score but also what can ruin your credit score.
What is a good credit score?
Credit scoring varies dependant on the source of information and the mathematical algorithm used to calculate it. There are a number of credit reporting agencies that gather up financial data and create your credit report. The big three credit bureas are: Experian, Equifax, and Transunion. If you monitor the information on your credit file with these three agencies, you should be in good shape. As for the credit score calculation, most creditors use what’s known as your FICO score or a variation of it. You should become aware of what your credit score is periodically as well.
Your credit score ranges usually between 300-850. Generally speaking, if your credit score is above 700, your credit is in good standing. Average credit scores tend to be between 600-750.
Top Credit Score Killers
The First Time You Miss a Payment
It may be obvious that missing payments is not good for your credit. After all, your payment history is the most influential piece of your score. But did you know when you first miss a payment, your score takes a big hit? This is especially true if you’ve had a good credit standing, to begin with. If you suddenly not pay a bill, it as seen as a sign of financial distress. As you miss further payments, each incident of a missed payment impacts your score less and less. But if you have a score in the 700s, expect your score to drop about 100 points if you miss a payment for the first time. Make sure you stay on top of your payments to avoid this credit killer.
An Error on Your Credit File
Credit report errors happen quite a bit and they do have lasting effects on your overall credit health. If an error is made on your file, such as a late or missed payment or a fraudulent account being added, will seriously harm your score. While you cannot avoid the errors, you check your credit report regularly and fix any errors you see.
Public Records: Bankruptcy, Forclosure, and Tax Leins
Although bankruptcy is currently the only public record that should appear on your credit report currently, be aware of all your public records and how they could be credit score killers.
Bankruptcy is often a very hard decision for someone and used as a last resort to gain some financial relief. When you file bankruptcy, you liquidate your assets and either discard or pay off debts. It is important to know that bankruptcy can generally stay on our credit report between seven and ten years. And bankruptcy can cause your credit score to drop more than 200 points.
Other public records include foreclosures, short sales, tax, and other leins. While not currently listed on your credit file, you should avoid these if at all possible. The agreement to remove tax liens and judgments from credit reports is a temporary agreement by the 3 big credit agencies. At some point in time, these items may return to your credit file. While they might not lower your score directly, these can greatly impact your entire financial wellbeing.
Opening and Closing Credit Cards
When you apply for new credit, the lender checks your score. This is a hard inquiry on your account and if you opt to open several new cards within a short time frame, this can damage your score. Each hard inquiry can lower your score up to 15 points.
Likewise, closing accounts can also hurt your score but for different reasons. While it might seem like a good thing to close a credit card that you don’t use, think again. When you close an account, you are essentially lowering your available credit. This changes your debt utilization ratio, which plays a vital part of your credit health. If by closing an account, you raise your debt to income ratio, you can jeopardize your good score. Additionally, closing an account may also shorten your overall credit history. Again, keep accounts open and use them fairly regularly to avoid hurting your credit.
Once an account that you neglect to pay is sold to a collection agency, the collection account can then be reported as a separate account on your credit report. This is a credit score killer. Collections accounts come from unpaid unsecured debt, such as credit card payments, medical bills, utility bills, student loans, and sometimes auto loans. The first time you have an account go into collections, you can expect your score to lower about 100 points. Collection accounts can remain on your credit report for seven years. It is best to be responsible for paying your bills on time and avoid collections.
Maxed Out Credit Cards
It can happen to anyone. All of a sudden, your credit card is creeping up to the maximum credit limit. But it is wise to not let this happen. Remember that your credit utilization, or the amount of money you borrow against your available credit, plays a key part of your score. If your score is relatively high, and then you max out your card, your credit score will take a substantial hit, up to 45 points. Anticipate expenses and use a variey of credit cards so that you don’t max out one of your credit cards.
If you’ve accumulated more debt than you can manage, you might be looking for a solution. Debt settlement companies work with your creditors to negotiate a lower amount of debt to pay back. Sounds great but it is not without a cost. Creditors report late and missed payments as well as indicate that your loan is in “Settled” or “Charged Off” status. Dependant on your original credit score, you could lose 50-150 points.
Loan Modification is usually for secured loans like a mortgage and is a change of your loan terms such as your interest rate. While this may help you avoid foreclosure, this will usually impact your credit score. During your application, you will be considered as a trial period where your reduced payments are made. You should ask how your loan modification is reported. You want to keep your loan status in your credit report to remain as “paid as agreed”. But some mortgage companies will alter your existing mortgage account status. Others will add a new account which has a larger impact on your overall debt-to-income ratio.
Short term credit score drops do occur when you opt to transfer balances from one loan to another. When you take out a new credit card, a hard inquiry is added to your credit report. Additionally, the average age of your accounts goes down. These factors will lower your credit score. Keep in mind the score model used. Certain credit score models can focus on credit utilization of individual credit cards rather than the entire. If so, having substantial debt on one card is not a good thing. This is why balance transfers can be a credit score killer.
Remember, building and keeping your good credit standing is worth all the effort. Reading our list of credit killers is wise so that you can avoid things that have significant negative consequences to your credit score. Stay on top of your payments and if you have a life situation where you are having difficulty, talk to your creditors right away. You want to avoid credit card killers to have the best score you can.