8 mistakes guaranteed to wreck your credit score

Credit scores have bearing on spending power like high school transcripts have bearing on college admission. Both had better be good.

FICO, a standard acronym in lending and credit reporting, stands for Fair Isaac Corporation. That’s a data analytics company that studies every move consumers make when they apply for loans, apply for credit cards, purchase things or pay their bills. Consumers are then scored on their financial habits. FICO scores determine eligibility for mortgages, car loans, credit cards, low interest rates and apartment rentals. Even prospective employers are interested in credit history.

Finding out what factors into that three-digit score is well worth the effort. Every day, responsible consumers who think they’re doing everything right unwittingly put their financial reputations at risk.

Here are eight common mistakes that can wreck a credit score:

1. Failing to pay on time

According to FICO representatives, the first thing that lenders look into is payment history. Every single late payment on a credit report knocks points off the final score.

2. Missing payments

Missed payments become collections, which usually remain on a credit report for seven years. This is true even if the payments are eventually made. A bankruptcy or foreclosure does about 100 points’ worth of damage.

3. Maxing out credit cards

Just because a card has a $5,000 limit doesn’t mean that it’s wise to take full advantage. Even people who pay on time and stay under their limits lose points for high utilization ratios.

Utilization ratio is a fancy term for the ratio of credit card debt to available credit. The balance on a card should never exceed 30 percent of the limit, and most experts advise keeping the balance under 10 percent. For example, a card with a $5,000 limit should never have a balance greater than $1,500, but $500 is even better.

That’s utilization ratio in a nutshell, but it gets more complicated.

Credit card issuers report each month’s ending balance to the credit bureaus. Someone may receive a statement with a $200 balance and promptly pay the full amount on time. Unfortunately, the credit bureaus have already been informed that the balance on the card is $200.
https://www.kiplinger.com/article/credit/T017-C001-S003-understand-your-credit-utilization-ratio.htmlJohn Ulzheimer, a highly respected credit expert, advises consumers to make each monthly payment well before the closing date. That way, the credit bureaus record a zero balance, and the utilization ratio looks nice and low. People who can’t pay the full balance in a month’s time would still do well to chip away at it throughout the month rather than wait for a statement.

Ulzheimer also suggests using just two or three cards rather than eight or 10. Businesses like gas stations and department stores typically have low credit limits. Charging just $40 at the pump or $75 at the perfume counter eats up a lot of the utilization ratio. “A good way to improve your credit score is to eliminate nuisance balances,” says Ulzheimer.

Another way to negatively impact this ratio is to take advantage of in-house, zero-interest financing. It’s tempting to use that kind of financing for furniture, appliances or even medical expenses, but the utilization ratio is at 100 percent right off the bat.

4. Not paying when a charge is in dispute

Even if a transaction is challenged, the account holder is expected to pay each month. The disputed charge will be designated as pending, but the cardholder is responsible for payment until the matter is resolved and a refund is issued.

5. Cosigning for friends or relatives

This could, and often does, have terrible repercussions down the road. Most people think of a cosigned loan as a shared responsibility, but in fact, the entire burden shifts to the cosigner if a friend or relative falls behind. Cosigning is potentially disastrous for credit scores and relationships alike.

6. Incurring a lot of debt within a short time span

This is a red flag that a consumer is in financial trouble, especially if specific charges are indicative of more trouble ahead. Payday loans, pawnshop transactions and charges for certain legal services are good examples.

Simply applying for too much credit all at once implies declining financial health.

7. Closing old accounts

Everyone agrees that canceling paid-off accounts feels good, but experts don’t advise it. Mistakes reflect poorly on a credit report, but responsibility reflects positively. Fifteen percent of the FICO score is based on the age of accounts. Old accounts in good standing are assets.

Furthermore, a credit card with a $10,000 limit and a zero balance has an impressive utilization ratio. That adds points to the score.

8. Forgetting that any kind of unpaid debt can go to collection

It’s not only mortgages, car loans and credit card accounts that are scrutinized. Any account that goes to collection can come back to haunt the consumer. Here are some examples:

• Unpaid rent
• Outstanding medical bills
• Delinquent taxes
• Back alimony or child support
• Unpaid recurring bills for things like cellphone service, utilities, cable TV, newspaper subscriptions and gym memberships
• Unreturned library materials or unpaid fines
• Unpaid traffic tickets

If FICO score mistakes can’t be cleaned up all at once, Ulzheimer advises tackling credit card accounts first. “Credit card debt,” he says, “is scientifically proven to be a riskier type of credit for lenders to extend, which means even smaller amounts … can have a significant impact to your FICO scores.”

Ulzheimer once simulated paying off a mortgage, a sizable car loan and a small credit card balance. Paying off the mortgage and car barely changed his score. Paying off the credit card improved his score by an astonishing 35 points.

Warren Buffett, the famously successful investor, has this to say about maintaining a good credit profile:

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

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