CREDIT SCORE TIPS Closing credit cards: It may seem like the responsible thing to do, but closing a credit card account can actually hurt your credit. Thats because it lowers the amount of credit you have available to you -- which can then hurt your debt utilization ratio (unless you dont carry any balance on your credit card). The length of your credit history is also factored into your credit score, so keeping a credit card open also helps with that. Related: Sneaky credit card charges can cost you hundreds Keep it open and charge a sandwich once a month just to have activity, and then pay it off each month, said Hardekopf. But if its just too tempting to have so many credit cards in your wallet, get rid of the one with the lowest credit limit, Ulzheimer recommends. Paying late: Your payment history is one of the biggest factors lenders look at and makes up approximately 35% of your FICO score -- so late payments on credit cards, student loans, mortgages or even doctors bills can all bring down your score if the company reports it to the credit bureaus. One or two isnt going to be significant but if its habitual its going to hurt you, said Richard Barrington, senior financial analyst at MoneyRates. Defaulting: The most obvious credit no-no is defaulting on a loan or credit card, which means you fail to pay back the amount owed to a lender. The biggest hits come from declaring bankruptcy or foreclosing on a home, which can easily slice 100 points or more from a credit score. Anything that can be classified as defaults on obligations are the bombshells that are going to leave a giant smoking crater on your credit, said Barrington. Opening too many credit lines: While having some credit is good for your score, there is such a thing as too much. Each time you apply for a loan or credit card, the lender makes an inquiry into your credit history, which usually knocks off several points from your credit score. Related: Fix costly credit report errors Applying for multiple credit cards or loans or increasing your overall available credit can also be a red flag. If youre continually adding to your potential credit, credit companies are going to look at that as a risk that you could become overextended at some point, said Barrington. So if youre one of those people who cant say no when a credit card offer arrives in the mail, this could drag down your credit [score]. Not having a credit card: A growing number of Americans 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 any credit history, youre typically considered unscoreable, meaning there isnt enough activity on your credit file to calculate a score. This leads many lenders to deem you too risky to take a chance on, said Ulzheimer. Related: Millions without credit scores not so risky after all Its like walking into a job interview with an empty resume, said Ulzheimer. [A lender] would have to roll the dice on you to give you credit -- and thats not a good position for you to be in. 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. But its a huge risk to take, and it can often result in ravaged credit. Related: Young Americans are ditching credit cards By becoming a co-signer, youre assuming equal responsibility for the amount owed, meaning any late payments or defaults will show up on your credit report and your score will suffer accordingly. You could also end up facing collection action or even lawsuits. Co-signing is a disaster waiting to happen, said Ulzheimer. Youre basically saying, yeah, I realize no bank wants to do business with you but Im willing to do business with you anyway. To top of page
Posted on: Tue, 21 Jan 2014 21:24:10 +0000
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