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Consumers Beware: Five Common Mistakes that Ruin Your Credit Score
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For more information contact:
Kelly Rote (713) 394-3201 |
Release Date: March 15, 2004 |
For the most part, your credit score is as uninteresting and irrelevant as your sleep number. However, if you are seeking a loan, obtaining insurance or hoping for a new job or promotion, a good credit history can make all the difference.
Credit scores range from 300 to 850 and score over 700 is generally considered by most creditors to be “good.” Unfortunately, how to rate this notation is not quite as simple as paying your bills on-time and as-agreed. While your payment history does account for 30% of your FICO score, there are several other factors that contribute. Following are five common credit killers and ways to avoid their damage.
1. Staying out of debt. Having no credit history is nearly bad as having a poor credit history. From a creditor’s perspective, if you have stayed out of debt your whole life, they have no way to judge how you would handle a loan. Maintaining several types of accounts proves that you can handle the responsibility. According to myfico.com, your credit mix (credit cards, store charge cards, loans, etc.) accounts for 10% of your score.
If you are experiencing trouble obtaining credit because you lack history, opt for a secured credit card. You make a deposit into a savings account with a bank to secure a line of credit. The credit card company then issues you a card and a line of credit for at least the amount of your deposit. To find a secured credit card, visit www.cardtrak.com, www.bankrate.com, www.cardweb.com or www.getsmart.com.
2. Rate shopping. Too many inquires can damage your score. Generally, six or more inquiries within a six month period of time will scare a lender. Applying for loans on the Internet or transferring balances on credit cards can have consequences for your credit score.
While multiple inquiries can negatively impact your score, most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Such inquiries are treated as one and will have little impact on your credit score. Mass inquiries by marketers are not seen by lenders and do not impact your score; neither does pulling your own credit report.
3. Assuming there’s a grace period. If your payment is if even one day late, it is late; you do not have to be thirty days late to reported as such. Even one late payment can negatively impact your score and according to the Fair Credit Reporting Act, the notation can remain on your credit file for seven years.
If your payment is due on a holiday, send the payment in early. Remember, your payment needs to reach its destination by the due date; “the check is in the mail” won’t cut it. In addition, many creditors are raising rates and even closing accounts as penalties for late payments.
Sending partial payments—even if they are on time—can also result in the creditor reporting you as delinquent. If you are having trouble meeting your monthly obligations, contact your creditors to request a revised repayment schedule. Many creditors have programs in place to help people experiencing temporary set-backs.
4. Closing old accounts. It may seem wise to close old, unused accounts; however it could hurt your credit score by shortening the length of your credit history. This factor makes up a whopping 15% of your score. Closing accounts also limits your amount of available credit. Credit scores take into account the proportion of credit used.
If you choose to keep old accounts open, be sure to keep tabs on them regularly to be certain they are not used fraudulently. Time is of the essence with dealing with identity theft. If you do choose to close an account, it will still appear on your credit report, and may be considered by the score.
5. Relinquishing control. Cosigning a loan has many risks and little reward. Any late payments made by the primary borrower will appear on your credit report. This is true even if you were unaware that late payments were being made. In addition, the cosigned loan could change your debt-to-income ratio, making it harder to qualify for future credit.
The best way to avoid this credit killer is to “just say no.” Most likely, you are being asked to cosign because the primary borrower is unable to qualify for the loan on their own. This may be because they are taking on more debt than they can realistically afford. Therefore, it makes sense for the primary borrower to wait until they can qualify on their own. In addition, combining friendship or family with money issues always carries risk.
Finally, when trying to improve your credit score, it pays to be persistent and patient. Scores are continually updated and may move several points each month; whether your score goes up or down is entirely up to you. If you are uncertain about whether or not it is worth the effort to improve your score, consider the following. According to Fair, Issac a person with a FICO score of 689 can qualify for a 7.81% interest rate on a 60-month new vehicle loan. However, a person with a score only one point higher can obtain that same loan at the much lower rate of 5.58%.
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Money Management International, is a non-profit community service organization that provides confidential financial guidance, counseling and debt management assistance to consumers. MMI helps consumers trim their expenses, develop a workable budget, lower their debt payments and repay debts. Services are available by phone. To visit with an MMI counselor, call toll-free 1-800-762-2271- 24 hours a day, 7 days a week. Spanish speaking counselors are available. Consumers can also learn more by visiting the MMI home page at www.moneymanagement.org.
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