Credit Score Killers

August 22, 2013

Credit score Killers

Your credit score can either make or break your financial future. Not only can it help determine whether you’re creditworthy enough to open a credit card, land a mortgage, rent an apartment or eve n get an auto loan, but it also plays a big factor in the interest rate you qualify for.

There are many types of credit scores known, but the most familiar is your FICO score, which ranges from 300 to 850. A score of 780 or above is considered excellent and will land you the top deals available, while a score of 720-780 is strong but many not qualify you for the best rates. A score of 680-720 means you would likely get approved for credit, but not likely to qualify for the most favorable rates, while having lower than 680 will make it difficult to get approved for credit at all and any credit you will get, will come with sky high interest rates.  

Best way to avoid this, is try your best to avoid common credit mistakes.

Carrying big balance: Running up piles of debt is never a good idea. Keeping a big balance on your card can increase your credit utilization ratio, which is the percentage of your credit limit that you use. Together with other measurements of your overall debt, this ration accounts for about 30% of your credit score.

The ratio is calculated using the end of the month balance that appears on your bill, meaning that your score can suffer, even if you do pay your balance at the end of every month. Best way to kept your utilization ration in check, it is recommended using less than a third of your credit limit.

Closing credit cards: It may seem like the responsible ting to do, but closing a credit card account can actually hurt your credit.  That’s because it lowers the amount of credit you have available to you which can hurt your debt utilization. The length of your credit history is also factored into your credit score, so keeping a credit card open also can help with that.

Paying late: Your payment history is one of the biggest factor lenders look into that makes up around 35% of your FICO score. So having late payments on your credit cards, student loans, mortgage or even doctor bills can bring down your score if the company reports it to credit bureaus.

Defaulting: The most obvious credit error, is defaulting on a loan or credit card, which means you fail to pay back the amount owed to the lender. The biggest hits come form declaring bankruptcy or foreclosing on a home, which can easily slice 100 points or more from a credit score.

Not having a credit card: A growing number of people are ditching credit cards as they turn to debit and prepaid cards instead but while this may keep you safe from debt, its not going to help your credit score. Without having any credit history, you’re typically considered unscoreable, meaning there isn’t enough activity on your credit to calculate a score. This may lead lenders to deem you to risky. It also hurts the diversity of your credit file, which accounts for 10% of your score and rewards you for having experience managing different kinds of credit, like credit cards, mortgages and auto loans.

Co-signing: Its tempting to help out a friend or relative by co-signing a loan when they cant qualify on their own. This is a huge risk to take, and it can often result in ravaged credit. By co-signing you are taking on equal responsibility for the amount owed, which means any late payments or defaults will show up on your credit score. You may also end up facing collection action or lawsuits.

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