Published in: Credit Cards | Oct. 12, 2019
Want to Protect Your Credit Score? Avoid These 5 Paths to Ruin
By: Dana George
Learn to avoid the mistakes that can damage your credit score.
The Fair Isaac Corporation (FICO) credit score is the most widely used credit scoring model in the U.S. FICO® Scores range from 300 to 850, although it is nearly impossible to have a score of 300. Anything less than 580 is considered "bad," while the average credit score in the U.S. is around 704. A score greater than 760 is likely to reward you with the most favorable interest rates, according to myFICO.com.
It's common to hear about all the things you can do to build your credit, but what about those little things you do (or forget to do) that ding your credit? What should you avoid to keep your credit strong?
Whether you took out your first loan 30 years ago or are just starting out, what you don't do may be just as important as what you do when it comes to protecting your all- important credit rating.
Path No. 1: Poor payment history
How diligent you are about paying your debt on time is worth 35% of your credit score. That means every late payment has an impact, and the way it works is a little wonky.
Equifax explains it like this: Say you have a credit score of 680, a score that falls near the low end of "good." Your credit has already taken two hits in the way of a 90-day late payment on a credit card from two years earlier and a 30-day late payment on an auto loan one year earlier. You forgot to pay a credit card bill last month, it becomes 30 days overdue, and your FICO® Score experiences another 60- to 80-point drop.
Now, your neighbor with a credit score of 790 also misses a payment. But instead of only dropping 60 to 80 points, his FICO® Score drops 90 to 110 points. Even though he's never missed a payment on any credit account, it feels as though he's being hit with a larger penalty. Still, after those drops, your credit score is down to 600 and his is at 680. It won't take him as long to recover.
Here are other stumbling blocks that can knock your payment history score:
- Entering a debt settlement
- Short sale on your home
- Deed in lieu of foreclosure
- Collections and charge-offs
- Cosigning for someone with bad credit
Path No. 2: Overutilization of credit
The way you utilize credit is worth 30% of your credit score. Creditors like to know that you have access to credit but use it wisely. If you received an allowance as a kid, you may have heard someone ask if it was "burning a hole in your pocket." What they wanted to know was whether you were itching to spend the money.
Creditors like to believe that you're not itching to spend money. They want to know that you possess such restraint that you only spend what you must and that lending you money is without risk. Here are other red flags that can scare lenders off:
- You've maxed out a credit card or several credit cards.
- You’ve taken out a debt consolidation loan to pay off high-interest credit cards.
- You canceled a credit card. Remember, having access to credit is a good thing. Utilizing too much of that credit is not. Once you cancel a card, you have access to less credit.
- You miss payments. It's a sure sign that you've taken on too much.
Path No. 3: Brief credit history
You can't help being young or a newly minted credit card holder, but lenders feel more secure dealing with folks who have a long, storied history of handling credit like a pro. In fact, length of credit history is worth 15% of your overall credit score. The next time you're tempted to cancel a credit card because the call center rep was rude, remember that the only way to build a long credit history is to hold on to credit once it’s granted.
If you have no credit history, consider:
- Finding someone to cosign a loan or credit card for you
- Opening a department store card
- Opening a secured credit card with a bank
A secured card with a bank requires that you put a deposit down equal to the spending limit on your card. In return, the bank reports your regular, on-time payments to the credit bureau each month, helping you to establish credit.
Path No. 4: You’re wild about taking out new credit
Like a significant other who doesn't seem to know their own mind, FICO wants you to have access to credit (without using it), but also gets nervous if you try to open too much credit over a short period. How often you apply for new credit is worth 10% of your credit score, and here's what makes FICO shake in their boots:
- You apply for too many credit cards (they worry you plan to run them up).
- You take out a loan to pay off credit cards (it indicates that your credit cards got out of hand).
Path No. 5: Poor credit mix
Your mix of credit accounts for 10% of your FICO® Score. Say you’re paying an installment loan, mortgage, auto loan, and several credit cards on time each month. FICO feels very good about the way you manage different types of loans. That's not to say that you should go out and secure a loan you don't need just so you can have a mix that FICO is more comfortable with.
Dings and dents to your credit impact more than just your ability to take out a loan. Your credit report can play a role in whether or not you’re hired for a new job, are approved for a cell phone, or can find a place to live. It even impacts whether you’re able to take out an insurance policy. Now that you know how to avoid damage to your credit report, you’re in a better position to protect it.
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