Your credit score is a fundamental financial metric essential to securing loans and lines of credit. Getting out of debt and building your credit is challenging, so the best way to achieve excellent credit is by avoiding common mistakes that will impact your FICO score, also known as a Beacon.
In this article, we cover 6 of the most common ways you can harm your credit. Avoiding these not only keeps your score from going down but will improve your score along the way.
1. Late or Missed Payments
Your payment history is among the most impactful factors credit bureaus use to assess your credit score. One late payment can tank your score by as much as 180 points and can even continue showing up on credit reports for up to 6 years! Continuous late and missed payments will completely destroy your credit.
Do everything you can to avoid missing a scheduled credit payment date. Auto-paying your minimum balance is the best way to keep on top of your payments.
2. High Credit Card Balances
Maxing out lines of credit regularly also significantly affects your score. If you are continuously hitting a limit, that signals financial stress and will likely lower your score.
We recommend keeping your credit card balances below 30% of your available credit.
3. Frequently Applying for New Lines of Credit
Another red flag for lenders is the frequency of applying for new lines of credit. When you apply for a loan or new credit card, a hard inquiry is made on your credit report. Multiple hard inquiries in a short period can lower your score.
Creditors view these requests as a sign of financial instability. Applying for a loan, a credit card, or shopping for credit when looking to buy a car or a house, should be a calculated decision that doesn’t happen on a regular basis.
If you are considering taking on a new line of credit, seek insight or guidance to ensure you aren’t harming your credit score.
4. Unresolved Collections
Accounts deemed uncollectible can significantly damage your credit. Not only will they hurt your score when unresolved, but they will also stay with you for years even after it’s been paid off.
If possible, don’t allow any account to go to collections. Do whatever you can to avoid the creditor turning the balance over by requesting more time or a payment plan. However, if you have 3rd party agencies looking to collect on your overdue accounts, pay them off as soon as possible. Some collectors will even accept a lower payment than the original amount. The worst thing you can do is ignore them because these accounts will be reported to credit bureaus. *Tip – If a collector is willing to accept a lower amount than the stated balance, make sure you get the agreement in writing before sending them any money.
5. Closing a Credit Card
Credit history length is another determining factor to keep in mind. Closing out a credit card in a short amount of time, especially with positive payment history, can harm your score. We suggest keeping the account open even if you aren’t using a credit card. This shows creditors that you have a long credit history and, as a result, will help your score. Be sure, however, to use that card at least once per year for a small purchase and pay it in full before the due date. This ensures an active rating to continue reporting on that credit product.
6. Co-Signing Loans
There’s a reason why a bank requests an applicant to obtain a co-signer – because they are at risk and could be financially unstable. As a result, you need to be very careful when you agree to co-sign a loan. If the borrower defaults on the loan, your credit score will likely be affected, and you will be responsible for paying off the entire loan if the other party fails to meet their obligation. Further to this, by cosigning on a loan, even if the primary signor makes perfect payments, the loan still counts against your debt service ratio (DSR), which comes into play should you be looking for a mortgage or a credit product of your own. In other words, that co-signed loan may show up on your credit bureau and be looked at by your lender as though you yourself are carrying that loan, even though you only co-signed. As a result, you may not be able to qualify for the credit product you are seeking.
Get Financial Consulting from Get Me Debt Free
Once you have a viable credit score, you can leverage it to acquire assets that build financial stability. At Get Me Debt Free, we help our clients get out from under the burden of overwhelming debt and offer them tools to maintain a positive credit score. Contact us today for a free consultation!