A good credit score allows you to finance a car, a home, and many other things — at fantastic interest rates.
It can help you get a job and obtain or keep a security clearance. This is very important for us in the Military!
You know your credit score is a very important number. How do you build and maintain a good one — and, over time, even improve your score?
The first step is to understand how your credit score is calculated.
The problem is the three major credit monitoring companies who determine your score (Equifax, Experian, TransUnion) arrive at that important number via a complex series of algorithms and other factors.
If you can figure out exactly how the FICO score is determined, you are probably the smartest person in the world.
For the rest of you, Credit Karma or your Annual Credit Report or a similar FREE resource is a good place to figure out what your credit score is.
But at the very least, you should know the five factors that are taken into account:
- Payment history — do you pay your bills on time?
- Amount owed — not only the total, but also your debt-to-credit ratio, which compares how much you owe with the amount of credit available to you
- Length of credit — how long you have been using credit? Including the average age of your accounts
- Types of credit being used — your mix of different categories of credit, including revolving accounts (such as a credit card or a retail account) and installment loans (such as a car loan or a home mortgage)
- New credit inquiries — how often do you apply for new credit? or take on more debt?
There are also plenty of things not to do. Here are 8 financial missteps that are guaranteed to damage your credit score.
1. Never Pay Late
A simple one right?
The primary concern of lenders is whether borrowers can repay the money they borrow. Consistent and timely payment history comprises 35% of your credit score.
When someone pays late, it signals unreliability. Oh, noes!
This doesn’t mean that one late payment will completely ruin your credit. What it does mean is that if you make a habit of missing payments or paying late, your score will suffer.
The best policy is to pay on time and in full. At a minimum, pay at least the minimum due on or before the due date.
2. “Maxing Out”
We’re not at the gym going for one rep max sets.
Avoid “maxing out” your credit card. It’s funny to me how people brag about their credit limits…
If your credit limit is $20,000, and you charge $19,000, you are using 95 percent of your available credit.
This is called over utilization and makes creditors nervous because your debt-to-credit ratio is too high. A good rule of thumb if possible; limit the amount owed to about 30 percent or less of your credit limit.
Just because you have a high limit, doesn’t mean you need to use it.
3. Debt/Credit Ratio
As a military leader, we should be familiar with this.
If we provide financial counseling for our Sailors, Soldiers, Marines, Airmen or Coasties, this percent usually determines whether they can move off-base or should buy that new Dodge Charger.
The ideal debt-to-credit ratio seems to be in the 1%-10% range, but anything under 30% is considered to be good use of your available credit. A low debt-to-credit ratio is an important part of maintaining a strong credit score
If your balances suddenly spike, but you have not been extended a new credit line, watch for a drop in your score. This is especially true if that balance is on a credit card and will not be paid off immediately.
The percentage of extended credit you utilize accounts for another 30% of your credit rating. This means that you should be aware of how much credit is extended your way, and keep the balances as low as possible.
4. Canceling Cards or Closing Older Accounts
Counter-intuitive as it may sound, canceling a credit card is not always a good option.
Even though you might not use them anymore, it still represents available credit to you. You may be tempted to close the accounts, but you should consider at least two things before doing so.
- First, closing an account could affect your debt-to-credit ratio because you will be cutting down on your available credit when you close the account.
- Second, if you have had the card for a long time, you may be hurting your length of credit profile.
Creditors like to see borrowers with long credit histories where they have paid on time, every time. The longer you have had a credit card and have made timely payments, the “more better.”
5. Too Many Credit Requests
You may be tempted to apply for store credit to receive that 10% off.
Don’t do it. You trigger a credit inquiry.
The more credit inquiries or applications for credit that you have, the riskier you will seem to creditors, and that will lower your credit score.
This applies when applying for more than one line of credit (e.g. HELOC – home equity lines of credit) within a short span of time. For example, if you apply for two credit cards in January, a consolidation loan in March, followed by a car loan in April, you can surely expect your score to plummet.
This may only be temporary, especially if you are starting a “new chapter” in your life, but be aware of how often you apply for new credit.
Note: If you have multiple requests for one type of credit within a short period of time, such as a car loan, it will count as one inquiry.
Be aware of different types of credit and how they might impact your score. For example, when it comes to home equity loans, there are differences between home equity lines of credit (HELOC) and home equity installment loans (HEIL).
One will often negatively affect your score and the other will not.
6. Ignoring Bills and Financial Responsibilities
Obviously, ignoring loans and lines of credit will hurt your score. This is why budgets are important.
But how do unpaid cable, utility and medical bills affect your score?
The answer: poorly
If you become delinquent on a payment, your credit will suffer. If necessary, set up a payment plan with these companies to avoid negative impact. For many of these companies, good faith is enough to keep your score safe.
Keeping in touch with them is one of the easiest and most important things you can do if you are having trouble paying bills.
Neglect is not the answer.
7. Tax Lien
The tax man or woman always gets their money. Just because they haven’t contacted you, or reached out, doesn’t mean you don’t owe them.
For military members, since we move every 2-4 years thinking that you got away with it after a few years means nothing. Most likely they sent you a notification via snail mail to a previous address on record. Also, you work for the government. It’s pretty easy to look up your pay…
A lien is a public record of an unpaid tax debt. Failure to pay your taxes can damage your score as badly as a bankruptcy — which can cost 240 points.
Be an American citizen and pay your taxes. Simple.
8. Ignoring Credit Score Inaccuracies
Failure to check your credit report and fix errors could end up hurting your score as well.
Credit reporting agencies make mistakes. We’re all human and make mistakes — until robots take over.
These mistakes could end up costing you thousands of dollars unless you are proactive enough to catch them and correct them. It is simple and free to check your credit reports once per year, so do not let this responsibility slip.
It is up to you to make sure that your credit report is accurate and in good standing. Failure to do so can give you years of headaches and money problems down the road.
Finally, you should know that if you have had past credit score difficulties, only two things will eventually help your credit score: making payments and the passage of time.
If you have had a “checkered” credit past, time will work in your favor as long as you discharge your debts as quickly as possible and, again, on time.
So do yourself a favor and avoid doing anything that can damage your financial reputation.
Remember, it follows you wherever you go.
Was this Credit Score article helpful for you? Let us know in the comments below.