The credit score may be the most important financial tool you have. Creditors use this number, calculated by credit reporting agencies, to determine how much of a default risk you would be as a customer. The credit score is calculated using your payment history, the amount of debt you owe, your credit history length, the variety of credit accounts you have, and how much new credit you have acquired. Maintaining a high credit score takes discipline, attentiveness, and a strong sense of responsibility. It involves avoiding actions that can prove detrimental to your score. Below are some of the activities that will lower your credit score.
Pay Your Bills Late
Sometimes, depending on the circumstances, you have to pay your bills a few days late. Most creditors understand this and since so many of their customers do pay bills a few days late, they won’t even consider submitting the information to a credit reporting agency. However, if you pay a bill 30 or more days after its due date, expect a subsequent ding to your credit score. Consistently pay your bills this late and you begin to show a pattern that may further lower your credit score, not to mention signal to potential creditors that you’re irresponsible.
Don’t Pay Your Bills at All
Let your payment become delinquent more than 120 days and some creditors may give up pursuing the debt. The creditor considers your account a lost cause and may place you in charge-off status. When this occurs, they report your new status to the credit reporting agency as “Unpaid – Charged-Off.” This is the worst possible mark you can have on your credit report. Having an account in “charged-off” status causes the most damage to your credit score. It signifies that you failed to pay the debt you owe or even make payment arrangements. If you have more than one “charged-off” account on your credit report, you will be viewed as a high credit risk and your credit score will reflect as such.
Too Many Credit Cards, Not Enough Credit
Credit, just like anything else, is best used in moderation. To have a good mixture of credit accounts show up on your credit report is actually a plus. Most creditors expect to see one or two revolving credit (credit card) accounts and one or two installment credit (car loan or mortgage) account. Having more than these expected amounts of credit puts fear into potential creditors. Upon checking your credit report, potential creditors will believe you have too much available credit and won’t be able to repay an additional obligation. Also, be mindful of how much you spend using credit. “Maxing out” your credit cards is very detrimental to your credit score. Part of calculating your credit score takes into consideration how much credit you have available compared to how much credit you have used. The higher the percentage of credit usage, the lower your credit score will be.
Getting Rid of Credit
If you have a credit card you don’t use, don’t close the account. Closing the account will lower the amount of credit you have available and along with it, lower you credit score. Instead, use the card periodically. The easiest way to do this is to use the card to automatically pay one of your recurring bills, such as cell phone or cable. Also, don’t close a credit account that you have had for a long time. Credit reporting agencies consider the length of your credit history in determining your credit score. If you close your oldest credit account, it essentially makes your credit history younger than it actually is and will result in a lower credit score as well.
Lack of Knowledge
Every U.S. citizen is entitled to one free copy of their credit report per year. Some individuals, however, fail to take advantage of this privilege. Not knowing what appears on your credit report leaves you susceptible to items that may damage your credit score. To err is human and creditors make numerous errors for a variety of reasons. Individuals with similar names or account numbers may end up with erroneous information appearing on their credit report through no fault of their own. Also, with the increase of identity theft, many accounts may show up that were not originally opened by the report’s owner. Regularly checking your credit report helps you avoid and correct any of these situations should they occur.
By avoiding any of the above activities, you can avoid lowering your credit score. Over time, using credit responsibly will allow your score to grow. Creditors will view you as a creditworthy applicant and seek to add you as a customer. Resist the temptation to take advantage of all the credit offers you receive. Simply continue on your path of wise credit usage and maintain your financial stability.