Your credit score is a quantitative measure of you creditworthiness, ranging from 300 to 850. It is based on the following five categories:
How much debt you have; your payment history; your debt utilization ratio; how far back your credit history goes; your mix of various types of credit.
Here are five things that can kill your credit score and lessen your chances of getting an affordable loan:
1. Making late payments. Payment history counts for 35% of your total score, so it’s very important to pay on time. Furthermore, if you’re late on a payment, it stays on your credit report for about 7 years. A single late payment can lower your score by as much as 80-110 points.
2. Carrying a big balance. 30% of your credit score is based on a debt utilization ratio – i.e., how much you owe in relation to your credit limits. So, carrying a balance of a high percentage of your available credit can adversely affect your score.
3. Closing a credit account. This goes along with #2. If you close one of your accounts because of security concerns or just because you don’t want any more credit, you might actually be hurting your credit score by raising your debt utilization ratio. As a very simple example, if you have two credit cards with $1000 limit each and have a $500 balance on one, you have a 500/2000 – or 25% – ratio. Closing one of your accounts doubles your ratio to 500/1000 – or 50%.
4. Opening an additional credit account. This is not really a killer, but just be careful not to open too many accounts at once. People who open new accounts are considered a higher risk immediately after opening an account. Also, when you apply for a new account, the credit card company needs to check your credit. This automatically dings your score 5-15 points. Any negative effect of opening a new account usually lasts only about 6 months.
5. Defaulting. This (foreclosure; credit card chargeoff; bankruptcy) is the single worst thing you can do to kill your credit. Any of these actions can knock your score down 200-250 points. But, if it happens, you can start building back by making on-time payments, keeping a low balance, and possibly taking out a small loan and paying it off.
As with any issue regarding money, credit, or identification, there are people out there ready to scam you and take your money for little or no service. Often, doing it yourself is the best way to repair your credit. The Federal Trade Commission’s “Credit Repair: How to Help Yourself” explains how you can improve your creditworthiness and lists legitimate resources for low-cost or no-cost help.
Whatever you do, don’t give up. Even if you’ve done some of these no-nos in the past, present good behavior can make up for a lot, and usually within about 2 years of consistently paying attention to your accounts, you can raise your score back to an attractive level.