Anyone who buys anything on credit – and there are millions of us out there – knows the bill eventually comes due. But do you know what damages your credit most? Or are you just going along month to month in blissful ignorance of how important your credit rating and credit score the most?
According to credit experts, these are the most damaging to your credit:
- Missing a payment. Yes, if you miss just one payment, your credit score takes a hit. How much will vary (unfortunately) between the three credit reporting agencies (Equifax, Experian and TransUnion). That’s because they use formulas that are designed to be anything but transparent. Some credit experts say you can suffer a 100-point drop for one missed payment. Just know that it never pays to miss a payment on a credit card, mortgage, HELOC, car loan or other loan, including student loans.
- Closing old accounts. This seems counter-intuitive. You’d think that dumping an old account you no longer use and have long ago paid off would be good for your credit. But when you close an inactive account, it actually can lower your credit-to-debt utilization ratio. What’s this? Essentially, it is how much credit you have at your disposal compared with how much credit you’re actually using.
- Opening too many accounts. Getting too many offers from credit card companies, each one trying to top the other? Don’t fall for it. Every application for credit generates a “hard inquiry” – and this appears on your credit report. Such hard inquiries may cost you from three to five points each on your credit score, and stay on your credit report for two years.
- Making big purchases just before your statement closes. This one usually shocks people. Even if you plan to pay off your balance in full when the bill comes, adding a big purchase just before the credit card statement closes doesn’t do your credit score any favors. That’s because credit card issuers report two things each month to the credit reporting agencies: whether you’re current on all your payments and what your card balance is at the time of the reporting. So, if you do make a large purchase, make it well before the card closing date, and pay it off as you make the purchase. That keeps your balance low at the time of reporting – and helps your overall credit score.
- Maxing out one credit card. Credit experts recommend that you never max out your credit cards, not even a single one. What if you have a card that’s approaching its credit limit? Plan to pay it down as soon as possible. Best recommendation is to avoid having your balance due exceeding 33 percent of your credit limit.
- Failing to keep tabs on your credit report. Let’s face it, mistakes do happen. You might not know that 35 to 40 percent of all credit reports contain at least one error. And if you’re counting on your credit score to help secure a better mortgage or car loan rate, but don’t check your credit reports (all three of them) for accuracy, you could be in for an unpleasant surprise. Biggest things to be on the lookout for are inaccurately reported balances or incorrectly attributed delinquencies. Get one free credit report per year (one every four months) from www.AnnualCreditReport.com. It’s the only authorized source for free credit reports as authorized by the Fair Credit Reporting Act.
- Not taking action on an account that’s in collection. If you get behind on your payments, can’t make your payments, or have some other reason for not being current on your payments, and your account goes to a collection agency, ignoring the situation could be disastrous to your credit. Suppose you know you paid an old medical bill, but you still get letters from a collector? This is something you need to take action on promptly. Either dispute the bill using the proper channels, or pay it and then get it removed from your credit report. Failure to take action can cost you 100 points on your credit score – not a good thing. And hospitals and other companies – like cable and phone companies, that don’t lend money, will report you to credit bureaus and send your unpaid (according to their records) bills to collection.