Here’s How to Ruin Your Credit Score (These Are Proven Ways)

What is a credit score you ask? Well, basically, it determines how likely lenders are going to let you get a loan.

Know that different lenders have their own standards for rating credit scores, but 700 and higher (on a scale of 300 to 850) is generally considered a good credit rating or score.

If you’ve got a bad one, it will follow you wherever you go.  Whether you are applying for a home loan, opening new lines of credit, or venturing into a new investment, your ability to obtain credit is incredibly important.  Even small, seemingly arbitrary decisions can affect your credit score.

It is important to take good care of your credit score, especially if you are planning to become an entrepreneur someday (you might probably need a big loan to fund your business at the onset, right?). You don’t want a constantly declined loan application, right?

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Or, maybe you are looking forward to a house loan when you reach 30 and start building a family. A declined house loan sucks.

But such is the price of having a bad credit score.

In order for us to avoid a bad credit score, we’ve listed a few terrible habits people make that hurt  their credit.

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1. Paying credit or loan payments late

While this mistake is obvious, almost everyone makes it once.  One of the main factors that a credit agency uses to determine your credit score is your past payment history. In most cases one or two late payments on your credit cards, loans, or other credit obligations will not significantly damage your credit record. But if mistakes add up, they will count against you.

2. Spending to your credit limit

A large portion of the calculation that contributes to your credit score is the debt utilization ratio.  You debt utilization ratio is simply the amount of available credit you are using. If you are running up credit card debt above 50% of your limit, your credit score begins to be affected.  Keeping your debts between 10-30% of your limit is advised.

3. Racking up credit card debt early in life

Most people get their first credit card while they are students in college.  Getting a good start to your credit history is important, but many fall victim to poor spending habits and maxed-out credit cards. Little do they know that past credit history usually counts for as much as 35% of your credit score. Missed and late payments will stay on your record for as long as six years, when most people are starting to apply for loans for graduate school, a car, or a house.  Falling into a debt trap when you’re 19 years old makes it much harder to get lines of credit later in life.

4. Closing credit card accounts

When you close a credit card account, you reduce the amount of credit you have available. Up to one third of your credit score is your debt utilization ratio. If you have to close accounts, try to close your newer accounts first, as older accounts have longer credit histories and 15% of your credit score is determined by how long you have used credit.

5. Applying for new cards often

Every time you apply for a new credit card, an official inquiry is made on your credit report. Every inquiry made on your report is another opportunity to earn a point against your score.  Multiple inquiries may also indicate a credit history with mistakes and problems.

  1. Ignoring or missing errors on your credit report

Check your credit report periodically to see if there are any inaccuracies. Medical payments, which tend to go through a long process before finally billing you, tend to rack up errors and/or inaccuracies.  AnnualCreditReport.com gives consumers the free annual credit report they are entitled to from all three credit bureaus. If you find errors on your report, contact the credit bureaus and begin the process of ameliorating them.

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7. Bouncing checks

Similar to missing credit payments, a consistent inability to make payments through a checking or debit account increases your chances of being reported to a collection agency, which will impact your ability to obtain future lines of credit.

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8. Borrowing money just to boost your credit score

While to it may seem unbelievable, there are credit schemes that bill themselves as credit score boosters.  Newsflash: You don’t have to carry a monthly balance on your cards to prove that you are creditworthy! Any quick credit schemes that promise anything will cost you, one way or another.  Avoid them at all costs, keep your debt utilization ratio below 30%, make your payments on time, and your credit score will improve.

9. Paying your rent late

Many landlords ask for rent on the first of the month, but don’t send it for several days.   While you may think that you can turn in your rent a little late (just in case), landlords can still report you for a late payment.  And if you don’t pay your rent for 30 days, even if you have a legitimate reason for withholding rent, your score can drop. Anything that gets you closer to an eviction notice will hurt your credit score.

10. Not alerting creditors if you have changed names

While this may seem trivial, not notifying creditors of a name change could result in credit report inaccuracies.  Bank accounts, credit applications, and other documents that become part of your credit history are integrated into your report through many different ways, some of which do not require identification like your social security number to be considered valid.

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You have worked hard to build a reputation of reliability and trust with your creditors.   Don’t let errors, inaccuracies, or ill-informed decisions tarnish your credit score.

Final Thoughts

As always, we say, “prevention is better than cure”. Fixing a bad credit score is much much harder than maintaining a good one, or improving a good credit history.

Again, strive to manage your finances better and avoid defaults. It is advisable not to exhaust 100% of your credit limit and leave 30% breathing allowance in it. Key to this of course is  to not spend above your means. Do not buy things you don’t need and if you really need to buy things, plan ahead of time how your finances will look like after each purchase. See if you can absorb the risk, if not, do not purchase anything.

Also, put your bills on autopilot. Talk to your bank and see if you can work a way to automatically deduct from your saving or your checking account the bills for your credit cards on a monthly basis. This will save you time, decision fatigue, and the huge risk of defaulting from your bills and incurring a terrible credit score.

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Sources:

Fontinelle, A. (2010). The 5 Biggest Factors That Affect Your Credit . [online] Investopedia. Available at: http://www.investopedia.com/articles/pf/10/credit-score-factors.asp [Accessed 21 May 2017].

Business Insider. (2017). 9 Ways To Destroy Your Credit Score. [online] Available at: http://www.businessinsider.com/9-ways-to-destroy-your-credit-score-2014-4 [Accessed 21 May 2017].

Yochim, D. (2017). 5 Ways to Ruin Your Credit — The Motley Fool. [online] The Motley Fool. Available at: https://www.fool.com/credit-cards/5-ways-to-ruin-your-credit.aspx [Accessed 21 May 2017].

uSwitch. (2017). What affects your credit rating?. [online] Available at: https://www.uswitch.com/credit-reports/affect-credit-rating/ [Accessed 21 May 2017].

MoneySavingExpert.com. (2017). Credit scores: Boost your credit rating – MoneySavingExpert. [online] Available at: http://www.moneysavingexpert.com/loans/credit-rating-credit-score [Accessed 21 May 2017].

Forbes.com. (2017). Forbes Welcome. [online] Available at: https://www.forbes.com/sites/laurengensler/2015/03/19/7-ways-youre-ruining-your-credit-score/ [Accessed 21 May 2017].

Hawlk, K. (2016). What Can Ruin Your Credit? 5 Sneaky Things — Money Matters — Trulia’s Blog. [online] Trulia’s Blog. Available at: https://www.trulia.com/blog/5-sneaky-things-you-didnt-know-could-ruin-your-credit/ [Accessed 21 May 2017].