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Quick and Easy Ways to Wreck Your Credit Score


Posted on June 14, 2011

 

Failing to make your payments on time will lower your credit score, but that may be the only reason that appeals to common sense. Stranger ways to lose points abound.

It takes years to build up a good credit score, but very little effort to trash it. In fact, sometimes it is the actions you take to manage your credit more responsibly that lower your score.  Obviously, missing payments affects your score negatively, as it should.

If you have several cards and aren’t using them, you might naturally think that getting rid of available credit and loans would show how responsible you are, and get you a nod of approval from the credit police, wouldn’t you? Actually, the opposite is true. Closing card accounts lowers your available credit, so the ratio between any debt you have and the amount you can make use of becomes higher. This is known as your debt to credit ratio, or debt load.

Say you have three credit cards, each with a $1,000 credit limit. That means you have $3,000 available to you. If you charge $1,000 on one card, your debt load is now $1,000 from $3,000, or 33.3% So now you have a monthly payment, and realize that by the time you get it all paid off (depending on your interest rate), you are going to pay $1,400 for $1,000 worth of stuff you didn’t really have to have after all.

You’re thinking like a grown-up now. Proud of your new awareness, you cut up one of your other cards since you will never be so frivolous as to charge $3,000 worth of stuff. You call the bank and close the account. Good job.

And now come the consequences of your good thinking. Having closed one of your accounts, you now have only $2,000 available credit, so your same debt now equates to a 50% debt load. Your credit score takes a hit. More responsible = less creditworthy in the eyes of the system.

Another aspect of the debt load that creates a catch-22 scenario is that owning too many credit cards can also lower your score. Many credit advisors recommend having three to five cards, but you have to be careful to manage them properly, which includes paying off balances each month.

Now, just in case you thought you were beginning to understand the credit ranking system, consider this: you are also penalized for having too many credit cards. You might lose points if you close them, but you also lose points if you keep them!

If you can pay your bills and other expenses with a credit card that gives you rewards points, you can get a valuable return for using your cards, but pay attention to the terms of the account. Many of these cards now charge an annual fee of $60 or more. That easily offsets any advantages of keeping an account open if your rewards are not too great.

If you lose your house (or other property) in a foreclosure or go bankrupt, your credit score takes a major beating. Ironically, there are many credit cards and car dealers who now consider you a prime customer because you are free of your former payments…but beware; they usually offer you interest rates that ought to be illegal.

It is often possible to settle an account with a lender and pay off the balance with an amount much less than what was due. If you come into a chunk of cash and can use it to get rid of some debt, it’s very advisable that you do so and if you can get a reduced payoff, that’s great; however, if the company reports the settlement to the credit bureaus, it may lower your credit score.

And for one last catch-22: If you apply for several cards (even if you don’t get them all) or shop for a car at a bunch of different places that all run your credit to give you the finance terms, then your credit score is penalized for too much credit shopping. On the other hand, if your cards never get used, then you aren’t building a credit history, so the reporting bureaus have nothing to report, thus leaving you with a low score.

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