Improving your credit score takes time and effort. Damaging it, or ruining it altogether is easier than you might think. All it takes is a slip-up here, a late payment there, and then your credit score is damaged. It doesn’t take much to hurt your credit, either. And, if you’ve made more than your share of credit mistakes, you won’t have many options the next time you are in the market for a loan or a credit card. You’ll pay the price for your misadventures, in the form of high interest rates and exorbitant fees.
The easiest way to hurt your credit is to break any or all of the rules that are important to lenders and creditors, which we’ll go over in detail here.
- Being late with bill payments. One third of your FICO score is based on your bill-paying track record. It’s been said that a payment that’s 90 days late is just as bad as filing for bankruptcy, or a repossession. However, sometimes in life things go wrong and maybe you aren’t able to get that payment out on time.
Most lenders will work with you to a point, and they are usually willing to let an “oops” here and there go. Just try to bring the account current as soon as you can, and don’t skip payments. If you can only afford to pay the minimum, do that. It’s better than doing nothing at all!
If you know ahead of time that you won’t be able to pay on schedule, call your lender and explain your situation. Hopefully, they’ll be understanding and give you a little “wiggle room”. It doesn’t always work, but if you’ve had a history of on-time payments for years, it can go a long way.
- Spending most or all of your credit line. Just because some guy in a suit somewhere has arbitrarily decided that it would be OK to lend you thousands upon thousands of dollars, doesn’t mean that you should spend it all. Don’t overindulge and buy a bunch of stuff that you really can’t afford. Curtail your spending, because your debt-to-credit ratio counts for another 30% of your credit score. It’s a good idea to keep your debt at or below 10% of your total credit limit. Anything up to 30% is OK to the lending world, but above 50% is not so appealing to banks and lenders.
- Forgetting your past. It may seem like the right thing to do, but dismissing your credit history-even if it happened years ago- isn’t such a good idea after all. The longer your credit history, the higher your score should be. A lot of people routinely cancel old cards that they don’t really use anymore, and then they are shocked to discover that their FICO score has been damaged. The length of your history accounts for 15% of your score, and closing old accounts is detrimental to your debt-to-credit ratio, that we discussed in the last segment. If you must cancel a card or two, start with the accounts that you’ve had for the shortest time.
- Signing up for a lot of cards. Most of us receive a ton of credit card offers, and it’s tempting to sign up for one or more of them. Sometimes it makes sense to shop around, but in this case it is better to stick with what you already have. Creditors like loyal customers, and if you go around asking for loans from other companies they might get antsy. New credit apps are 10% of your score, and if lenders see that you’re making multiple applications within a short time, they’ll close their pocketbooks and your score will go down like a sinking ship.
Don’t think that borrowing money will increase your score, and don’t buy into the old myth that says you have to have a balance on your cards to prove that you have credit. Also, variety can be a good thing. Having a diverse credit portfolio constitutes 10% of your credit score. Aim for a combination of car loans, perhaps a mortgage, and some revolving debt (usually your credit cards). There’s only one problem with diversifying your portfolio- a risk that you’ll damage your credit score simply by applying for loans, as mentioned above.
As there are many ways to damage your credit score, there are only really two surefire ways to mend it. One is time. Most credit blemishes disappear from a report after seven years. The other is paying your bills on time, every time. Doing so will increase your trustworthiness with your creditors, and the responsible use of your credit will look good to any lender you may encounter in the future.
Your credit report is the basis for your financial standing. No matter how slick or smart you may be, no bank will touch anyone with a low credit score. It's their money, why would they want to take a bigger risk than they need to?
If you don't know where your credit report score is at, now's the time to take a peek. Don't get surprised with a low credit score when you go in to review your report with a potential lender or even an employer, find out for yourself within minutes.