You’ve built your credit score into something that you’re proud of having. Or, maybe you’re rebuilding after not being financially responsible early in life. No matter the reason, you don’t want simple errors to ruin your credit score.
There are quite a few things that can happen that will damage your credit score once your lenders report them to the credit bureaus. Here is a list of ten simple things to avoid and not ruin your credit score.
Paying Your Bills Late
It almost goes without saying. Paying your bills late is the fastest way to damage your credit score. Your payment history and timely payments make up 35% of your FICO score that the Fair Isaac Corporate calculates. Over 90% of all lenders use the FICO score to make their determination about a borrower. Paying your bill on time, even if it is the monthly minimum payments, should be your top priority to preserve your credit score.
Like paying late, skipping payments is a quick way to ruin your credit score. Skipping payments and paying late are what factors into the 35% payment history category with your FICO credit score. While the other three credit bureaus, TransUnion, Equifax, and Experian, have their own formulas for their proprietary credit scores, each bureau is almost like in the priority they place on payment history.
Keeping High Credit Card Balances
Another factor that the credit bureaus use to compute your credit score is your credit utilization. Credit utilization is the ratio of your credit limit to the total amount you have borrowed.
So, for example, if you have a credit card limit of $10,000 and you have a balance of $5,000, your credit utilization ratio is 50%. The amount of debt you owe and your utilization rate comprise of 30% of your FICO score. A fast way to ruin your credit and damage your credit score is to maintain high credit card balances.
Opening Too Much New Credit Too Fast
In most cases, if you open up multiple lines of credit or credit cards in a short span of time, it will negatively impact your credit score. While that’s not necessarily true when you shop around for a new car loan or a mortgage, it can affect your credit with multiple credit card applications. The credit bureaus have soft and hard credit pulls and shopping around for the best rates on car loans and mortgages are factored into their proprietary algorithms that compute their scores.
But, if you are simply going on a shopping spree and opening multiple store credit cards, you’ll ruin your credit and damage your credit score. You should space out applications for new credit.
Closing Cards with High Limits
Closing your credit cards can damage your credit score. It’s a little contrary to what you would typically think. You would think that since you have less credit out there, you’re less of a risk to borrowers. But, the opposite can be true.
Closing credit card accounts impacts your credit utilization ratio we talked about before. For example, if you have two credit cards each with a credit limit of $10,000 and only one card has $5,000 in charges on it, your credit score will take a hit if you close the card with no balance. You’ll move from a 25% utilization ratio to 50% overnight. By closing an account, you’re not changing the amount you owe your lender, but you’re changing the denominator in the math problem.
Not Checking Your Credit Report
If you don’t check your credit report, you’ll never be able to find out if there are errors on it. You should check your credit report from each of the three credit bureaus at least once per year. You can receive a free one from each credit bureau at annualcreditreport.com.
I recommend requesting one from a different one every four months. Rotating your requests every four months will allow you to see each one at least once per year, and you’ll be able to monitor your credit report every four months for big changes. If you see an error or something strange in one, then you can check the others right away. Not checking your credit report often and from each of the credit bureaus is a recipe to ruin your credit.
Not Paying Charges You’re Disputing
If you disagree with your credit card company or a disagreement about an amount another company that has charged your credit card, you have the right to dispute the charges. We’ve all probably disputed errors, fraud, or other purchases that we’ve made with our credit cards.
In most cases, the error is cleared up, and you can go about your day like normal. But, sometimes, the credit card company sides against you. But, just because a charge is in dispute, you can’t stop paying at least the monthly minimum balance on your credit card. Paying the monthly minimum balance is not an admission of a valid charge you’re disputing. You must continue to make the monthly minimum balance payments even if you have an on going dispute or investigation.
If you fail to pay at least your monthly minimum balance to the credit card company according to your agreement, they will report the late or non-payment to the credit bureaus. And, like we’ve talked about before, late or non-payment of your bills is the fastest way to damage your credit score.
Cosigning for a Credit Card or Loan
It’s never a good idea to cosign for a loan. It’s a bad idea to cosign or let someone be an authorized user on your credit card. If you do, you’re liable. If they don’t pay, the credit card company or lender will hold you responsible for making the payment.
You also might not find out that payments have been late or missed until months down the road. By that time, the lender will have reported the issue to the credit bureaus, maybe before you even realize it.
Paying Your Rent Late
Believe it or not, but your landlord can report your late or missed payment for your rent to the credit bureau. Most landlords and rental properties don’t report on time payments for tenants to help them build their credit history and credit score. But, they’ll sure report a late or missed payment if you’re not careful.
Not Using Credit at All
Finally, if you’re not using credit, then you’re not building a credit history. Your credit history accounts for 15% of your FICO credit score. It’s a little counterintuitive the think about not having a credit score for not using credit.
But, you typically have to have shown that you can properly use credits to have a credit history, which in turn gives you a credit score, that you can then use to apply for more borrowing. The lack of history is one reason why many people look to start with a secured credit card to build a credit file and later show other lenders how they handle repayments.
There are quite a few ways that you can damage your credit score. Things can snowball very quickly if you’re not careful. You can avoid these simple things and not ruin your credit score if you know first what things go into the score’s calculation and then strive to sidestep them.