Building good credit is like trying to lose weight -- it takes time, effort and persistence to reach your goal. But if you don't stay diligent, you'll fall short of what you want to achieve, and your credit score always have a little "junk in the trunk."
Having a poor or even mediocre credit score won't get you very far in today's world, especially with most of the country still in a post-recessionary hangover. Poor credit can keep you from getting good interest rates on loans and even keep you from landing your dream job if the company runs a credit check on you after the interview.
So how has your credit score been looking? Think you've been doing all the right things but you're not seeing your credit score shape up the way you want it to? Believe it or not, even some of your most innocent decisions and actions can hurt your credit score.
Paying off your credit card debt is a good feeling. It's fine to stop spending on your credit cards, chop them up or even them in the freezer in a block of ice, but for the sake of your credit rating, do not close them.
According to myfico.com, 15% of your credit score is based on the length of your credit history and 35% of your score comes from your payment history, so closing a credit account wipe out 50% of the information that is essential for potential lenders. This damages your credit score.
Closing a credit card account also lower your available credit compared to your existing debt, raising your credit utilization ratio. This raises a flag to creditors because you are using more of your available credit and you're perceived to be a higher risk for default -- further damaging your credit score.
The Answer: Don't close any credit card accounts if you absolutely don't have to.
2. Applying for Too Many Credit Cards or Personal Loans Over a Short Period of Time
Having a good mix of cards and installment loans shows lenders that you can juggle making payments on many different kinds of credit.
But putting in applications for every department store or mailed credit card you're offered over a period of a month makes you a risky proposition to lenders. It might say to them that you are preparing to use your credit cards as an emergency fund for an imminent job loss or that you plan to go on a huge bucket-list travel splurge.
The Answer: Apply for credit cards and loans as you need them over time rather than all at once.
3. Using Too Much of Your
If you are carrying a high debt balance compared to your total credit limit, it could be hurting your score. 30% of your credit score's calculation is related to amounts owed, so you want to shrink your credit utilization ratio to keep your score high.
The Answer: You can do this by either paying down your debt balances, or by asking your credit card issuers to raise your credit limits on your cards. The lower you can keep your credit utilization ratio, the better the chance your credit score stay out of harm's way.
4. Making Risky and Risque Purchases
Some lenders look closely at what you spend on in order to determine if you are a financial risk or not. This means that if you are using a credit card for "adult entertainment" (i.e., strip clubs, adult website memberships) on a consistent basis, you be considered riskier than others.
Risky purchases don't stop at porn. If you are using your credit card to buy lottery tickets every week or for sporadic shopping sprees, credit card issuers and lenders see this as a sign of desperation and financial irresponsibility.
If you regularly rack up impressive bar tabs or liquor store receipts, credit card issuers are likely to think you are drowning financial sorrows away with alcohol. While it's perfectly acceptable (and encouraged) to have a regular happy hour session, if you make it a habit of frequenting bars and charging a bunch of drinks, you can raise a flag.
The Answer: Use a credit card for smart purchases and for any risky or risque purchases you must make.
You might think that having a few credit cards with low credit limits is not only good for your finances and credit score, it also makes you credit-savvy. But it might actually damage your score.
Having credit cards with low credit limits suggests to creditors that you have no experience with higher limits, which is a huge flag for when you need to get a substantial loan.
Low limit cards are also very easy to max out. So if you max out some or all of your low limit cards, your credit score may suffer. Why? Because every time a credit card is maxed, lenders may file an "inquiry" to the credit bureaus. and consistent inquiries hurt your credit strength. It's like a boxer repeatedly being hit in the ribs throughout a match. After several rounds of body blows, he is going to go down more easily.
The Answer: This problem isn't solved with a snap of a finger, but you can cut back on the amount of low-limit cards you use and focus on improving the credit limit on one or two cards at a time.
6. Getting a Divorce
If you are about to go through or currently in the process of a divorce, there may be a chance that financial problems are on the horizon. Credit card companies and lenders know that divorce is most certainly accompanied by increased debt and possible bankruptcy. Lenders raise flags over the possibility of future losses if they believe you are going through a divorce or about to start the process.
The Answer: An amicable, smooth financial process during a divorce can stop the bleeding for your credit score. While it may still take a small hit, it shouldn't cause any permanent damage.
7. Making Only the Minimum Payment
Sending a check for only the minimum payment on your credit card(s) is great for your short term budget, but can prove disastrous to your credit score. Creditors may view you as being high risk because just making the minimum payment suggests that you are financially overextended.
And with the amount of interest you undoubtedly accrue for any remaining balances, paying only the minimum can cost you thousands of dollars over the life of the card. In fact, if you continue to pay your debt this way, you could end up paying twice to ten times the amount you initially owed.
The Answer: Reduce the amount of cards you use to a handful and pay down the debt. If at all possible, pay off the total balance each month in order to avoid any interest.
8. Unpaid Tickets and Library Fees
Ever come back to your car after lunch to find a pesky parking ticket placed under your windshield wiper? Did you remember to ever pay the ticket? If not, you'd better pay it off soon!
According to Craig Watts, a spokesperson for FICO (the most widely used credit score), having unpaid parking and moving violation tickets can ding your credit score once the city turns the "consumer debt" over to a collection agency, which shows up on your credit report.
Forget to return a library book years ago that you know you never paid for? Those unpaid library fees can be turned over to a collection agency as consumer debt as well.
The Answer: Unpaid tickets and library fees are as bad as unpaid loans and credit cards as far as the credit bureaus are concerned. Don't treat those parking tickets and library fines like a disposable post card -- pay them off before they're due to keep your credit score unscathed.
9. Not Exercising Your Credit
Do you have a zero balance on all of your credit cards, or don't use them more than a few times a year? Congratulations! But once again, it may damage your credit.
No one likes to be in debt, but when it comes to credit scores, a little debt is actually a good thing. If you don't have any debt in your name, how do lenders know if you are a reliable borrower or a hazardous risk?
Let's come back to the weight loss analogy. If you don't exercise, your muscles get weak and you get flabby. The same happens to your credit. While it looks great on paper to have a zero balance, you need to "exercise" your credit cards in order to build and maintain a strong credit.
The Answer: If you are debt-free and don't have any credit cards... get one and use it responsibly. Pay rent or your mortgage with it and then pay it all off.
Yes, it adds a step to the payment process and takes away your precious time, but it also helps build a great credit score for when you DO want to make a big financial move.
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