Your credit score is the gateway to your borrowing ability and how cheaply you can get loans, and so you want it to be as high as possible. If you boast a credit score of 750 or more, you are going to pay the lowest interest rate being offered on most loans and credit cards. But if your credit score is 650 or lower, you will get hit with a lot of fees and higher interest-rate charges, if you get approval for credit at all. Because most Americans don’t have a huge sum of money to pay for a house, buy a new car or even send their child to college, keeping your credit score intact is the best way to avoid overpaying when borrowing. Far too often people make mistakes that can hurt their credit score for as long as seven years. From missing payments to foreclosing on your home, here’s a look at five bad moves that will torpedo your credit score.
Make Late Payments or Miss Them Altogether
One of the simplest things to avoid that can have a big impact on your credit score is missing payments on your credit cards, mortgage, student loans or any other secured or unsecured debt. (Read More In “How Credit Card Delinquency Works.”) That’s because one of the things the credit-scoring agencies look at when determining a credit score is your payment history. Missing a payment here or there is no big deal, but if you have a lot of late or missed payments over a long period of time, your credit score will be hurt big time. Even paying just the minimum each month is better than being late with your payments.
Carrying Too High Credit-Card Balances
In addition to your payment history, a big part of determining your credit score comes from the amount of current debt you have. (Read More In “3 Important Credit Score Factors”.) Known as credit utilization, it is the ratio of credit-card balances to credit-card limits. The lower your credit utilization is, the better your credit score will be because it demonstrates you have self-control. Sure you may have $10,000 available in credit, but if you used only $1,000 of it, you will look good in the eyes of lenders. If your credit cards are maxed out, then your credit utilization will be 100%, which doesn’t bode well for a high credit score.
Your Account Goes Into Charged-Off Status
Missing payments in and of itself will hurt your credit score, but do it too often and the status of that particular credit card could go into charged-off status, which means that while you still have to pay back your debt, you aren’t allowed to make purchases on the credit card. Typically an account is charged off after 180 days of non-payment and will remain on your credit report for seven years.
An Account Is in Collections
Just because you ignore the bills in the mail and the telephone calls from your creditors doesn’t mean they will miraculously go away. While ignoring it may buy you some time, at least in your mind, wait too long to deal with a bill and it will end up in collections. Many companies enlist third-party collection agencies to recover past-due debts for them. (Read More In “How The Debt Collection Agency Business Works.”) If your account ends up in collections and you do nothing about, your credit score will fall. Having an account reported as in collections can result in a substantial reduction in your credit score. For people who have high credit scores to begin with, the number of points you stand to lose will be more than someone with a low credit score.
You Foreclosed on Your Home
The housing bubble and subsequent bust of a few years ago left many people with underwater mortgages and big monthly payments they couldn’t afford. The result: a period of record foreclosures that torpedoed many American’s credit score. And although many people were in the same boat, that didn’t prevent their credit scores from taking a big hit from a foreclosure. Not to mention the foreclosure will stay on your credit score for seven years, although the impact does lessen with time. As soon as you start having trouble making your mortgage payments, it’s a good idea to contact your lender to see what options are available to you. Although a foreclosure won’t ruin your credit score forever, it will have a negative impact in the medium term.
The Bottom Line
Having a high credit score means you don’t have to overpay when you borrow. But a credit score can easily change if you aren’t careful. Making some big mistakes such as being late or missing payments, letting an account become classified as a charge off or ending up in collections and foreclosing on your home are all ways for a good credit score to quickly become a bad one.