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Blogging for Change Blogging For Change
by Jesse Campbell on August 26, 2013

man understands fastest ways to ruin credit

Good credit is a marathon. Bad credit is a sprint.

If you think about it, it makes sense. Credit – and more specifically, your credit score – is a measure of trust. Lenders don’t have the time to get to know you personally. They can’t talk to your mom or your 12th grade physics teacher. They don’t know you, so they need a quick way to determine whether or not they should lend you money.

And that’s where your credit score comes from.

Think about the major purchases you might make and all of the information that’s available to you about that manufacturer or store or product or service. You can review that data – from consumer reports to customer reviews – and then make an informed purchasing decision.

Creditors need that same data. Your credit report is essentially the consumer report on you and your history with borrowed money. Your credit score is a fast, uniform method of aggregating that information into a numeric representation.

If you’ve ever done it yourself, you know that lending money requires trust in the borrower. And you probably also know that trust takes a long time to earn, but it can be broken almost instantaneously.

So that’s what your credit score is trying to communicate to creditors – how much they can trust you with their money. You build that trust – and your score – slowly, by using credit responsibly.

Unfortunately, no matter how well you’ve built that trust, it can be destroyed. Quickly. Here are the fastest ways to bring that trust – and your score – crumbling down around you.

Missed payments

Timing is everything with credit scores.

Have you ever worked somewhere with one of those big signs that says how many days it’s been since the last accident? The message is rarely about how many accidents they’ve had, but more about how far in the past those accidents occurred.

Your credit score views missed payments similarly. A 30 day late two months ago has more impact on your score than a pair of 90 day lates five years ago. Recent negative reporting has a greater impact, because it more accurately reflects your current ability to repay borrowed money.

Again – creditors don’t have the ability to really know you or to accurately account for events that are generally out of character. There may have been a very good reason why you were late, something that is very unlikely to happen again, but creditors don’t usually have the resources to account for that kind of nuance.

If you miss a payment your score will go down in a hurry. The only way to remedy that is by making on-time payments going forward, and letting the number on your __ Days Since a Missed Payment sign get higher and higher.

Closing old accounts

Each new relationship you create with a creditor or lender is built on the back of your previous relationships with creditors. Those creditors are basically your references, even if they don’t exactly write letters of recommendation for you.

When you close old accounts those references disappear. The quantifiable “trust” that is associated with that long relationship is then essentially removed from your score. Any negative reporting associated with that account, however, remains until at least seven years after the negative event occurred. So you lose all of the good, but keep the bad.

If you’re considering closing old accounts with unfavorable terms just keep in mind that unless the rest of your credit history is solid and well-established, your score might take a heavy hit.

Overextending yourself

Even if you’ve never missed a payment, opening a lot of new accounts and maxing out the accounts you already have could have a distinctly negative impact on your credit score. Why?

Again, think of yourself as a lender. If your cousin asked you for $100 and you trusted them (and had $100 to spare), you’d probably be okay making that loan. But if your cousin asked you for $100 and you already knew that they owed your brother $500, your father $700, your uncle $1,000, and your grandmother $5,000, you might be less inclined to make that loan.

Your current debt responsibilities play a factor in your ability to get new credit. Lenders want to eventually get their money back, remember. So it shouldn’t be a surprise that taking on more and more debt will eventually cause your score to go down.

To maintain a healthy score avoid maxing out accounts and limit the number of open accounts available to you. If you’re already maxed out, get to work paying down debt.

Assuming that everything’s okay

Because your credit score doesn’t seem to have an impact on your everyday life, it’s easy to assume that everything’s fine. It’s even easier to assume that when you’ve never missed a payment, maxed out an account or done anything else to threaten your score.

But even if you’re doing everything right, your good credit can still be undone overnight. Credit reporting errors are incredibly common and so is identity theft. The worst part is that most consumers won’t become aware of these issues until they’re applying for credit or a loan and find out that their “perfect credit” isn’t so perfect anymore.

Everyone is entitled to a free copy of their credit report every year. Visit AnnualCreditReport.com and make sure you’re checking your report regularly. The sooner you spot errors and illicit activity, the sooner you can start fixing those issues.

Three slightly slower ways to really ruin your credit

  • Default/charge-off/collections
  • Debt settlement
  • Bankruptcy

Getting to the point where your accounts have gone to collections is not especially fast, but it does result in your credit taking a pretty big hit. On the positive side, at least those accounts might still be paid in full, which could partially salvage the situation.

Settling on your accounts – or paying back a percentage of what is owed rather than the full amount – isn’t fast either, but that also has a significantly negative impact on your credit. In that case, the creditors have been able to recoup some of the debt.

The road that ends at bankruptcy, meanwhile, is usually long and painful. Filing for bankruptcy generally means that all unsecured debt is discharged. Corresponding lenders do not recoup any of the debt.

In all three of these scenarios, something has happened that would cause future lenders to be wary of giving you money. You’ve become less trustworthy. And, as a result, your credit score will be affected.

Knowing how easy it is to see your score slip, it’s important to be proactive. If you see yourself struggling to make on-time payments, overextending yourself or making bad credit decisions, ask yourself what the root problem is and create a plan to meet that challenge head-on.

If you need help identifying those problems, don’t hesitate to speak to a certified credit counselor. There’s never a fee for counseling sessions and the information shared is always confidential.

Do you know what's on your credit report?  Do you need help pulling and reading your report?  MMI now offers Credit Report Reviews - we can pull a copy of your credit report and review the information with you.  The service is free, but only available for a limited time, so visit our Credit Report Review page for more information and give us a call today!

Comment(s)

Dan says:
August 29, 2013

This is a really helpful article.



elizabeth schommer says:
September 13, 2013

First, I want to thank mmi for all the help and trust they put in me to pay off a $32,000 debt. We had a home equity loan and had to put in new windows ,carpet and an attic blanket to cut the cost of heating in the cold Wisconsin winters. When the economy took a dive, we were afraid if my husband lost his job that we could loose our house and end up homeless. Our wells fargo credit card had a 4.9% interest rate so we did a loan transfer and paid a hefty amount each month and were making progress. Then president Obama decided that he would punish the banks and help those who did not pay their bills. What ended up happening was that those who did pay got their interest raised to 24% over night. We were now paying $1000.00 a month and getting no where. We swallowed our pride and contacted mmi who were great and got us a 1% interest rate and cut the thousand dollars a month in half. Three years passed and all was well and the debt was going down. Then the economy took a dive and I became very sick and the medical bills got higher and higher and we were not able to pay the $503.00 each month and the medical bills and eat. I contacted mmi who did a new budget for us and called wells fargo to ask for a lower monthly payment until we could get back on our feet. To my disbelief, wells fargo said no to the loan reduction. I was shocked. Perfect credit and never a day late or a penny short and in this time of need, wells fargo said no. MMI lowered their fees to try and help but alas here is where we are. I have lost all respect for big banks. I have learned that doing the right thing does not always pay off in the long run. I double coupon. Hardly ever eat meat. Eat whats on sale. Take my bike when ever I can. Buy my clothes and shoes at goodwill and never go out to eat, yet until banks like wells fargo stop taking into consideration that the people who make them rich, might need a helping hand and someday they too might find themselves looking for a hand.



G says:
August 31, 2013

Help - what if you have been unemployed.. Not many temp assignments and two more checks $32 each from unemployment... I had protection which my card canceled in mid March when I got unemployed but kept us on until July 2013. I was to receive 12 months. The problem - I received in July payments for Apr-Jun; July also and then in Aug - then they paid the remaining 8 mo. While this monies was find what the trouble is I was counting on the payment monthly giving me 8 months to earn monies toward my card. My monthly min was $285 or $295 but now it is $227. Who cares - I can't pay it. I am not working. I can't borrow any monies from my mom though I am good for it because may dad died in late May and her bills are tallying. I live at home with her. CCCS who helped me before cannot help me now as I am not working. I do not want to be on Welfare. If I ask for attorney help from the State they want to put me on welfare. I am a capable person and have always had a good work report. Can you help?



Georgienna Bethel says:
December 19, 2013
Website: The seven fastest ways to ruin your credit

I've been unemployed for 3 years now and I still worry about my credit. I never been in a situation like this.



Lin says:
August 29, 2013

Fortunately, my program to repay my debt with the help of MMI is almost over. It has been the longest and difficult periods of my life....but, I made the debt and I wanted to repay it. Unfortunately, my credit score began to go way up over the last 5 years but, now, with the total payment to some of my creditors, THEY are closing my accounts for me. Big hits and my score keeps going down, down, down. I never thought of this and was so elated over the past 5 years to see my score going up as I was paying down the debt. But, creditors do get even with you in the end by closing the account and affecting your credit. All in all, MMI helped me enormously. This is the only place to go to get good, honest help. It is your only way out of a very bad situation. I'm thankful I found them and I can't tell them how much I appreciate all their help. They've been there for me whenever I've needed them. So, thank you, MMI!!!!



Yolanda Hernandez says:
August 29, 2013

I, need help.



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