This article was updated April 12th, 2017
Improving your credit score takes some elbow grease. Ruining it, on the other hand, is a piece of cake.
Just a few false moves, and in no time, your credit reputation starts to suffer. It doesn't even need to be something extreme, either. Just a late bill payment here or a retail splurge there is all it takes. Woe to the consumers who make a few missteps in a row and find themselves slogging through suboptimal loans (high rates, high fees) the next time they're shopping for credit.
The surest way to be blacklisted is to break the rules that matter most to the very folks measuring your creditworthiness. Here are the five key gotchas and some ways to stay in the lending world's good graces.
1. Missing a payment
Hey, it happens -- you're on the lido deck during your family getaway, and -- doh! -- you remember that the credit card payment was due three days ago. No big whoop, right?
Actually, you are right ... to a point. Credit card companies actually do have a heart (or at least offer a little leeway), and they're willing to let a few missteps slide, particularly in how they treat 30- and 60-day late payments that are brought up to date right away.
Still, if you make a habit of it, prepare for some brutal consequences, since one-third of your credit score -- the most popular being the FICO score from Fair Isaac -- is based on your bill-paying habits. According to Credit.com, a single 90-day-late payment is as damaging as a bankruptcy filing, a tax lien, a collection, a judgment, or a repossession.
The lesson here is simple: Pay your bills on time. Don't skip any bills -- and certainly not your rent or your mortgage payment. Send in just the minimum amount due, if you have to, but send it in. If you know your payment will be late, call your lender and explain, and he or she might give you a free pass, just this once.
2. Spend up to your credit limit
After all, a bunch of bankers in suits have deemed you worthy of a spending limit of $5,000, $10,000, $20,000, or maybe even $40,000 or more on your credit cards. Financing a Bugatti has never seemed so within reach.
Back to earth, Trump wannabe. Sure, you might have a $15,000 credit limit on your card, but that doesn't mean that's how much you can afford to spend. Even a temporary splurge could turn into long-term debt trouble if you're not careful. Just ask Michael Jackson.
Keep those cards in your pockets and avoid coming anywhere near maxing out your credit cards. The measure of debt to your credit limits counts for a whopping 30% of your overall credit score. Our advice is to keep your debt to below 10% of your limit -- and you are paying the bill off every month, right? If you can't handle that, keep in mind that around 30% is "acceptable" to the banking world, and that red flags start waving when your debt-to-available-credit ratio exceeds 50%.
3. Cutting down your average account age
You may want to deny your past -- that Limited Express charge card you used so often during college was so long ago.
But that's the point. The longer your borrowing history -- particularly if you've been a responsible, card-carrying citizen -- the better your score. Too many people cancel old credit cards when spring cleaning their wallet, and then are shocked when it affects their credit score.
The length of time you've spent in the system determines 15% of your overall score, not to mention the impact of closing lines of available credit that factor into your debt-to-credit ratio mentioned above.
Celebrate and retain your credit history. If you're going to cancel some credit cards, start with newer accounts, since the old ones help establish your long and illustrious credit record.
4. Too many credit inquiries
Given the number of credit card solicitations mailed out each year, it seems that everyone is in line to win the plastic popularity contest. Playing the field is tempting, and sometimes you should. If you're trying to pay off debts, shopping around for the best deal makes sense. Most of the time, though, you should stick with what's in your wallet.
Lenders like loyalty. Think about it: If you lent someone money, you'd probably get nervous if that person started asking all of his or her other friends for a loaner, too. Lenders check your credit file regularly to see whether you're dating around. (New credit applications affect 10% of your credit score.) If they see you applying for lots of credit at once, they tighten their purse strings and fire a few warning shots at your credit score.
Also keep in mind that every line of credit you apply for will stay on your record for at least seven years, even if the account is open only for a day or two. So take great care when opening and closing accounts.
5. Adding on too many debts
Dressing to impress and picking up the happy-hour tab are classic tools to get ahead in some circles. So you may wonder whether there's a way to buy your way to better credit.
There's something to be said for variety. Those with perfect credit scores have a demonstrated history with a variety of loans -- such as installment loans, like a car loan or mortgage, and revolving debt, such as your workaday credit card. Types of loans affect 10% of your overall score.
The problem with trying to quickly add variety to your borrowing portfolio is that doing so may put you in a worse situation than where you began. Remember, when you apply for loans, you'll experience a short-term drop in your score. And then there's the money -- paying interest or annual fees or other costs of borrowing just to add some cards to your credit portfolio.
Don't borrow money just to boost your score, and for heaven's sake, don't believe anyone who tells you that you have to carry a balance on your cards to prove your creditworthiness. That's bunk.
There are just two things that are guaranteed to boost your credit score:
1. Time. (Remember, most bad marks fall off your report after seven years.)
2. The proper use of credit. (Responsible bill-paying habits matter most to those judging you.)