The Biggest Threat to Your Credit Score
by Christy Bieber | Updated July 21, 2021 - First published on Dec. 17, 2018
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Your credit score is an important financial metric. You don't want to put it at risk by ignoring this major threat.
Your credit score is one of the most important numbers in your life because it affects how you borrow money for a loan, and many other important transactions. It's imperative you understand how to earn a good credit score -- and what it could cost you by lowering your credit.
In particular, there's one big thing that's the biggest threat to your credit score: financial irresponsibility. Financial irresponsibility is a threat to your credit score for four key reasons.
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1. Financial irresponsibility can lead to maxing out your cards
One of the most important metrics in determining your credit score is the amount of your available credit you've used. Keeping your credit utilization ratio to less than 30% is ideal if you want to earn the highest possible credit score. And keeping it lower is even better both to avoid interest charges and to show you aren't a reckless borrower.
Unfortunately, if you're financially irresponsible, you're more likely to charge up to the limit on your credit cards. This raises red flags to lenders who fear you'll get in over your head and become unable to pay your debt -- and it can drag your credit score down.
2. Financial irresponsibility can cause you to pay late
If you aren't financially responsible, you may make a late payment because you forget to pay on time or because you don't have the money to pay. This can seriously damage your credit, as payment history is the single most important factor in determining your credit score.
Depending where your score was when you paid late, one payment that's 30 or more days late could drop your score between 60 and 110 points. You can't afford to make this mistake, so make sure that you make every payment on time.
Ideally, you'll pay off the balance in full each month when you pay your credit cards, as carrying a balance can become very expensive. But, even if you can't pay off the card, make at least the minimum payment by the due date.
3. Financial irresponsibility could cause legal action against you
If you're not financially responsible, you could end up in so much debt that you need to declare bankruptcy.
Or, you might end up with a creditor suing you, a bank foreclosing on you, or a car loan lender repossessing your vehicle. If any of these things occur, it will send your credit score plummeting and it will take a very long time for your score to recover.
4. Financial irresponsibility could lead you to apply for too much credit
Finally, if you're financially irresponsible, you may end up applying for more loans and credit cards than you should. When you apply for new debt, an inquiry is placed on your credit report. The number of inquiries is a factor in determining your credit score.
Too many inquiries makes lenders wary that you may be going on a borrowing spree. Your credit score will suffer until the inquiries drop off your report -- which takes two years from the date of the inquiry.
Taking on a bunch of new debt also lowers the average age of your credit, which is another important factor in determining your credit score. The longer you've been using credit, the higher your score will be -- provided you've been responsible -- because lenders can see you've been doing the right thing for a long time. Lowering the average age of your score by applying for many new loans due to financial irresponsibility is a bad move.
You can't afford to be financially irresponsible
When it comes to your credit score, you simply cannot afford financial irresponsibility. You owe it to yourself to pay your bills on time, to keep your credit utilization low, and to do what it takes to earn good credit.
If you don't behave responsibly, your credit score could suffer and it could take you a long time to rebuild your credit. It's not worth the hassle -- or the problems with borrowing -- that come from behaving in an irresponsible way.
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About the Author
Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
