Your credit score is one of the most important factors of your financial life. Banks use it to decide whether to give you a credit card or loan. Some service providers use it to determine whether you should pay a security deposit. Car insurance providers consider your credit score when setting your insurance rate. While it's important to know what things help you build a good credit score, you also have to know those things that could hurt your credit score and lead to side effects from bad credit. If you avoid doing the following fifteen things, it will help ensure a good credit score.
Thirty-five percent of your credit score is your payment history. Consistently being late on your credit card payments will hurt your credit score. You should always pay your credit card bills on time to preserve your credit score.
Not Paying at All
Completely ignoring your credit cards bills is much worse than paying late. Each month you miss a credit card payment, you end up one month closer to having the account charged off.
Having an Account Charged Off
When creditors think you're not going to pay your credit card bills at all, they charge off your account. A charge-off means the insurer has given up on you. Often synonymous with the term "written off," this does not mean you're no longer responsible for the debt. This account status is one of the worst things for your credit score.
Having an Account Sent to Collections
Creditors often use third-party debt collectors to try to collect payment from you. Creditors might send your account to collections before or after charging it off. A collection status shows that the creditor gave up trying to get payment from you (because it was fruitless) and was forced to hire someone else to collect the funds from you.
Defaulting on a Loan
Loan defaults are similar to credit card charge-offs. A default shows that you have not fulfilled your end of the loan contract. Meaning, you've chosen not to pay back the money.
Bankruptcy is an extreme measure and will devastate your credit score. It also stays on your record for seven years. It's a good idea to seek alternatives, like consumer credit counseling, before filing bankruptcy.
Having Your Home Foreclosed
Getting behind on your mortgage payments will lead your lender to foreclose on your home. In turn, the late payments will hurt your credit score and make it harder to get approved for future mortgage loans.
Getting a Judgment
A judgment shows that you not only avoided paying your bills, the court had to get involved and force you to pay the debt. While they both hurt your credit score, a paid judgment is still better than an unpaid judgment.
High Credit Card Balances
The second most important part of your credit score is the level of debt, measured by credit utilization. Having high credit card balances (relative to your credit limit) increases your credit utilization and decreases your credit score. In other words, if your limit is $10,000 and your balance is $9,500, you will not have a good score.
Maxed out Credit Cards
Maxed out and over-the-limit credit card balances make your credit utilization 100 percent. This is the most damaging thing you can do for your credit score.
Closing a Credit Card That Still Has a Balance
When you close a credit card that still has a balance, your credit limit drops to $0 while your balance remains the same. This makes it look like you've maxed out your credit card, causing your score to drop. Always pay off your balance before shutting down a credit card.
Closing Old Credit Cards
Another component of your credit score, 15 percent, is the length of your credit history—longer credit histories are better. Closing old credit cards, especially your oldest card, makes your credit history seem shorter than it actually is. Even if you don't use the card anymore, if there's no annual fee, you should keep the card open because you have nothing to lose.
Closing Cards With Available Credit
If you have several credit cards, some with balances and some without, closing those credit cards without balances increase your credit utilization.
Applying for Several Credit Cards or Loans
Credit inquiries account for 10 percent of your credit score. Making several credit or loan applications within a short period of time will cause your credit score to drop. Always keep applications to a minimum.
Having Only Credit Cards or Only Loans
A mix of credit is 10 percent of your credit. When you have only one type of credit account, either loans or credit cards, your credit score could be affected. Usually, this comes into play when you have very little additional credit information in your credit history.