Credit Scores: Small Mistakes that Spell BIG Trouble
Most people are aware of the big actions that can cause your credit score to take a tumble: filing bankruptcy, having an account sent to collections,or being foreclosed upon. However, these are not the only actions that can decrease your credit score. Here are some other mistakes a consumer can make with their credit. While not ‘major offenders’, these 5 missteps can still prohibit you from joining the credit elite.
Maxing out your credit card.
The balance to limit ratio is almost as important as paying your bills on time, accounting for 30% of your credit score. A good rule of thumb is to never charge over 30% of your credit limit. This means if you have a total of $10,000 as the limit on your credit cards, you should never have a balance greater than $3,000.
Consumers who think they are managing their finances wisely by only having one credit card, but are using over 30% of the limit are actually HURTING their credit score.
Missing a payment
Just one 30 day late payment can drop your credit score significantly. Payment history is the single most important factor in the calculation of your credit score, at 35%.
A consumer who has no late payments on their credit history is gaining lots of points for their positive usage! One late pay can change all that. It is possible for a good credit score to drop 80 points with just one 30 day late.
Whether you sign up for automatic payments through your bank, get an app that reminds you, or write the date your bills are due on your calendar, pay those bills on time!
Not checking your credit report.
It is estimated that over a third of credit reports contain some sort of error. These bits of erroneous information can be accounts showing late that were actually not late, collections that should have never gone into collections, or accounts that are not even yours!
By not checking your credit report, these errors linger on your credit history and can cause your score to take a dive. Be sure you are checking your credit report at least once a year. Review all accounts, balances, and payment history. Make certain to follow up on any information that looks erroneous, and get it removed from your report by filing a dispute.
Co-signing a loan.
Sure, you want to be a good friend, neighbor, cousin, brother, etc. and help obtain a line of credit your loved one cannot qualify for on their own. However, becoming a co-signer on a loan for someone else is really asking for trouble. If the borrower does not pay on time or at all, you are responsible for the loan.
The loan will also show up on your credit report and be factored into your credit score. If the borrower is paying late, all those late pays will show up on your credit report, affecting your credit score in a very negative fashion. And once that happens, there is nothing you can do about it.
The scariest part of all is that this can happen without your knowledge. Co-signers rarely receive a copy of the bill, so they would not be made aware of the issue until the account was in a default status.
The best advice on this one is: Just say NO!
Closing an old credit card
15% of a person’s credit score is their length of credit history. Credit cards are factored in by the age of the oldest account, and the average age of all the accounts.
Look at this example. Say you have 4 credit cards. The oldest is one you opened in college, 22 years ago. The others you have had 15 years, 9 years, and one you just opened 2 years ago. Currently, the oldest account is 22 years old, and the average age of the accounts is 12 years. If you close the oldest account, that changes the oldest account to 15 years, and the average age of the accounts decreases to 8 years. This change in credit history can cause a decrease in your credit score.
The best idea would be to keep the old credit card, and use it a few times a year to make sure it is positively factored into your credit score.
It’s obvious to guard against bankruptcy, foreclosures, and collections. Also make it a top priority to put measures in place to make sure you don’t make any of these small credit mistakes either. Your credit score will thank you for it!