Inside: Learn what not to do if you want a good credit score. These mistakes can ruin the good credit you’ve worked hard to attain.
Just as it takes time and effort to build trust, it also takes time and effort to build credit. In both cases, a few mistakes can wipe all that hard work away
How, exactly can you ruin your credit score?
Make Late Payments
One of the most effective ways to ruin your credit is to make late payments or miss payments altogether.
If you missed a payment by a few days and pay the balance right away, that is unlikely to affect your credit unless you are a repeat offender.
But, once your payment is 30 days late, it is reported to the credit bureaus. Recent late payments hurt your credit score more than older ones. And, as the old saying goes, the bigger they are, the harder they fall. People with excellent credit may see a drop in their credit score by as much as 110 points. Those with lower credit scores will likely see less of a drop in their score.
The good news is that if being late is a one-off and not a regular occurrence, then your scores shouldn’t be negatively affected for too long. In that case, your score should bounce back after a few months.
Once your payment is 90 days late, that will really hurt your credit score for as long as 7 years. Ouch. At this point, creditors consider you at risk of missing more payments.
Related: Money Basics: What is a Credit Score?
Open Too Many Cards at Once
Let’s say you are in college or a recent graduate and the credit card offers are flowing in. If you decide to open too many cards at once, that sends up a red flag to creditors. Why? To them, it indicates you may either have a spending problem or a cash flow issue. If you are just starting out, it is better to apply for one card at a time, with at least 9 months to a year between applications.
This isn’t to say it isn’t bad to open more than 1-2 credit cards. But opening too many in a short time span lowers the average age of your credit cards. Remember, one factor in credit scores is the length of time credit lines have been open.
Each time you apply for a new line of credit, there is a “hard credit inquiry”, which can ding your credit score temporarily.
Co-Signing a Credit Card
When you co-sign a credit card, you are trusting someone else to be responsible and not ruin your credit. And yet, that person’s credit line requires a co-signer because their credit score is low for a reason.
As a co-signer, you are placing your credit score in someone else’s hands. If they pay late or not at all, it affects your credit and you are just as responsible for the debts as they are.
Related: The 7 Best Ways to Improve Your Credit
Using Too Much of Your Credit
Outside of missed payments, credit utilization has the biggest effect on your credit score.
In an ideal world, you will never go over 30% of your credit limit. In the real world, stuff happens. Maybe the car broke down the same month you paid for airline tickets and you’ve charged $2500 on a card with a $5000 limit. Now you are using 50% of the available credit on that card.
Your score will be negatively affected. But, if you pay off or pay down that balance promptly, the drop in your credit score will be temporary. Also, if you are able to spread out charges over a couple cards so that both your individual account and overall credit line usages is under 30%, that is better than putting everything on one credit card.
Getting Credit Before You Are Ready for the Responsibility
Are you ready to handle credit cards? If you suspect having access to a credit card will lead you to overspend, or don’t fully understand how they work, then it is better to avoid credit cards for the time being. While convenient, it is best to think of credit cards like debit cards, but with added perks and protections.
Closing Accounts
Have you been paying down your debt, conquering your credit cards and regaining control of your finances? Good for you!
It is tempting to close your credit card accounts as you pay each off to eliminate the urge to use the card. This isn’t the best idea, at least not initially.
Why?
It all comes down to how much of your available credit you are using. As you close each credit card account, that takes away from the amount of available credit you have. Before closing an account, do some calculations and see if by closing the card you end up with a credit utilization of over 30% over all your accounts. If so, try tucking the card in the back of a drawer. This way, you still have a larger line of credit available, and less is being used.
Not Checking Your Credit Report
When was the last time you checked your credit report? If it has been a while then you don’t know what is on there. We have seen incorrect addresses, wrong name variants and credit lines listed as open that had been closed.
Those aren’t horrible issues (though they still needed to be taken care of), but what if someone else opens a credit card or a mortgage under your name? Identity theft can wreak havoc on your credit, so stay on top of things. Head over to AnnualCreditReport.com to get a free copy of your credit report.
Related: Money Basics: What is a Credit Report?
Pay Rent Late
As with bills, being late with your rent can impact your credit scores. Many people aren’t aware but landlords are able to report late rent payments to the credit bureaus. Most landlords don’t report late payments to the credit bureaus, but why would you risk it?
Related: How to Fix Your Credit, Gimmick-Free
It takes time to build good credit and only a couple of mistakes to drag it down. With time and good habits, it is possible to repair your credit and enjoy a high score along with the perks that go along with that.
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