There’s one thing all of us know about our credit score: We don’t want it to go down.
Since lenders use these three digits to evaluate our creditworthiness and determine our interest rates, losing points on our score could cost us thousands of dollars — or even cost us a loan.
For that reason, we asked John Ulzheimer, credit expert at CreditSesame.com, to highlight a handful of credit-damaging actions to avoid at all costs.
Whatever you do, try your best not to:
1. Miss payments. While it’s in your best interest to pay your card in full and on time, sending the check a week late probably won’t damage your score. But after 30 days, the clock starts ticking. “Once you’re 30 days past due, which is one full payment cycle, you’re considered delinquent,” explains Ulzheimer. “It will show up on your credit report, and be reflected in your score, until you pay it off.”
Once it’s paid, he says, it’s considered a “historical delinquency” and isn’t such a big deal — unless you were delinquent for three times that long. “The minute you hit 90 days, all bets are off. It’s considered a major delinquency and stays on your report for seven years after you pay it off.”
2. Use up your available credit. Just because you have $US15,000 of credit available to you doesn’t mean you should use $US14,999. Ulzheimer explains that your credit utilization ratio (that’s how much of your available credit you’re using), is extremely influential when it comes to calculating your score. The less you use, the better.
While it’s sometimes advised that responsible credit users keep their utilization at 30-50% of their limit, he points out that it’s actually a better idea to aim lower: 10%. “The people who have the highest credit score in the country, 780 and above, have an average utilization of 7%,” says Ulzheimer. “And that’s straight from FICO.”
3. Swear off cards for good. If you’ve had a bad credit experience (read: debt), you might consider shredding your cards. But Ulzheimer says you should try and hold yourself back. “If you stop using your cards cold turkey and stop using credit altogether, you’ll eventually cease to be scored,” he warns. “Then, when you do want to get back in the market and buy a house or a car, it’s going to be more difficult to do that because of your lack of score.”
If card issuers notice you haven’t been swiping, they may actually reduce your credit limit or close your account. To combat this, Ulzheimer recommends finding a non-problematic way to use your cards. “Pay for necessities, things you’re going to have to pay for anyway, and then pay off the balance at the end of the month,” he suggests. While taking a short hiatus from credit isn’t the end of the world, he adds, you shouldn’t expect your cards to be open after spending five years away.
4. Limit yourself to one card. Besides leaving you without a backup should your card be lost, stolen, or declined, having only one card can be detrimental to your credit score. It’s all thanks to that pesky utilization ratio — you can read Ulzheimer’s full explanation here.
5. Close your card with the highest limit. Strike up another one for the utilization ratio. If, for instance, you have a card with a $US15,000 limit and you’re carrying a $US2,000 balance on a card with a $US5,000 limit, you have $US20,000 of available credit and your ratio is a comfortable 10%. If you close the $US15,000 card, your available credit plummets to $US5,000 and your ratio skyrockets to 40%.
“If you’re going to close a card, fine,” says Ulzheimer. “But be cognisant that you’re lowering your limit. I would never close a card like this before going out and applying for something like a mortgage — you could pay more in interest because of what you’ve just done.”
6. Fall behind on your taxes. Among the horrible things that could happen if you don’t pay your taxes is the fact that your negligence could tank your credit score. That’s because the IRS can take actions against you — such as placing liens (which are simply claims) on your property or appropriating your wages — which will eventually end up as public record.
“Credit reporting agencies pick up that kind of report,” warns Ulzheimer. “A tax lien is a major delinquency, but it doesn’t follow the same seven-year rule as other major delinquencies. An unpaid lien will stay on your report until it’s paid, plus seven years after it’s released.” And remember: What’s on your report factors into your score.
7. Sell your home via short sale. Ulzheimer points out that 10 years ago this might not have been a concern, but after the financial meltdown of 2008, many homeowners disposed of bad mortgages through short sales. “A short sale is basically a settlement,” he explains. “The mortgage lender has agreed to take less than the full balance you owe and let you out of the home. It’s reported in your credit as a settlement, which is considered a major delinquency and will show up for seven years.”
In fact, in some states the lender can come after the homeowner for the remaining funds after a short sale and report that money to the credit bureaus as an unpaid balance. The ability to do that is called “recourse,” and it’s state-specific — in non-recourse states, it can’t happen. “At the very least,” says Ulzheimer, “understand what you’re getting yourself into when talking about short sales.”
8. Take advantage of multiple card offers at the mall. “When you’re shopping, 15% off for opening a new card is pretty compelling, but it’s an unsophisticated way of applying for credit,” Ulzheimer explains. “When you agree to the card and the cashier gets your info, they’re actually running your credit report.” When a potential issuer — whether or not it’s your favourite store — looks at your report like this, it’s called a “hard inquiry,” and it affects your credit. While the occasional hard inquiry generally only dings your score by a few points, and generally only appears on one of your three reports, a handful of hard inquiries in a short period of time (say, the shopping-heavy holiday season) compounds any impact.
More importantly, he adds, opening a handful of new cards lowers the average age of your credit by factoring in these new, shorter credit lifespans into the length of your credit overall — and the older your credit, the better, simply because a longer credit history gives lenders that much more information about what kind of borrower you’ll be. “People always talk about credit inquiries, but the average age of your accounts is much more important,” Ulzheimer says. “If you continually add new accounts, you’ll always have a young credit card age.”
9. Co-sign on someone else’s credit. According to Ulzheimer, co-signing on another person’s credit is “maybe the worst idea ever. There’s a reason the bank is asking for a co-signer — they have determined the person isn’t credit-worthy on their own. When you co-sign, you’re immediately liable for their debt, which shows up on your credit report. Then, when you apply for credit, the lender takes the other person’s into account.”
Even if the other person is making the payments, that debt is considered your responsibility — and if he stops making those payments, you’re expected to make them. “I would never advise anyone to co-sign for credit, not even in a marriage,” says Ulzheimer. “Unless you need two incomes to qualify for a mortgage, there’s no need for it.”
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