When you plan to buy a house, you’ll need a mortgage. But to get one, you mustn’t ruin your credit score before the day the sale is closed.
No matter what your plans for the future are, your credit score influences most of your financial life. If you have a good credit score, you can get a loan for your new car, probably even a new house. Credit score determines are you obliged to pay a security deposit for many service providers. Car insurance providers often look at your credit score to determine the size your insurance. Mortgage lenders look at your credit score to decide whether they’d give you a loan.
Building a good credit score is important, and most people know how to raise it. However, it’s just as important to know what not to do. Below are 15 mistakes people do that can ruin your credit score entirely.
Payment history makes some 35% of your credit score. This makes it most important factor of your FICO score and credit report. Because of this, one of the biggest ways to ruin your credit score is to be late on your monthly payments. Whether this is because of lack of finances, or you just tend to forget things, this is a huge mistake. Make sure you always pay all your bills and loans on time so you don’t have to worry about losing your FICO points on this.
Not Making Payments
What’s the only thing worse than being late on your payments? Not making payments at all. If you don’t pay your loans on time, you risk having your account charged off. And if there’s a big loan, such as mortgage, that you’re not repaying, you’re even risking losing your house.
High Balances on You Credit Cards
Another important factor when calculating your FICO score is how much balance you have on your credit cards. Too high balances will decrease your credit score, as chances of you repaying your debt are slim. How high is too high depends on your income and your credit card limits.
Allowing Your Account to Be Charged Off
If you’re so late on your payments, creditors might decide you’re no longer able to pay your credit card bills. When this happens, they’ll charge off your accounts – or, your account will be written off. In other words, they’ve given up on you. Despite what this sounds like, you’ll still be liable for repaying what you owe. This is one of the worse ways you can ruin your credit score, right next to foreclosure.
Allowing Your Account to Be Sent to Collections
A step that might occur before your account gets charged off is to have it sent to collections. This happens when creditors hire third-party debt collectors to charge you what you owe.
Defaulting on a Loan
Allowing this status is one of the worst mistakes you can do that can ruin your credit score. This is similar to having an account charged off. Defaulting on a loan means that you have chosen not to fulfill your part of the loan contract.
Bankruptcy will devastate your credit score for seven years, just like foreclosure. While this is a good short-term fix for some financial issues, we would never recommend filing bankruptcy as long as there is any other alternative solution. Consult consumer credit counseling if you don’t have an idea what to do.
If you’re too behind on your mortgage payments, your lender will begin a foreclosure of your home. Usually, this happens if you’ve missed four monthly payments. Not only will you lose your home, but foreclosure will badly hurt your credit score for seven more years. This might ruin your chances of applying for a new mortgage.
Getting a Judgment
A judgment means that not only you haven’t paid your bills in time, but the court had to get involved and force you to repay your debt. You can choose to pay it or not. While both paid and unpaid judgment will ruin your credit score, the latter one will have a greater and longer impact.
Maxing Out Your Credit Cards
If you max out or go over the limit of your credit cards, this means your credit utilization is 100%. This is probably the most damaging thing you can do for your FICO credit score.
Closing a Card with Balance On
Closing a card before you’ve emptied it means that your limit drops to $0, while the balance remained the same. This looks just like you’ve maxed out your credit cards, and the consequence is the same. Don’t do this.
Closing a Card with Credit Available
Closing credit cards that don’t have balance but still have credit will increase you credit utilization, and thus decrease your credit score.
Closing Old Credit Cards
Many people don’t realize that closing old credit cards can ruin your credit score. This is because credit card history makes 15% of your FICO score. The longer the history – the better. If you close your old cards, this makes it look like your history is shorter than it really is. Unless there is an annual fee, leave your old cards open. You’re not losing anything, and there is much to gain.
Applying for Too Many Loans or Credit Cards in Short Time Span
Credit inquiries is around 10% of your FICO score. If you make too many new loans or open too many new credit cards in a short period of time will ruin your score. Always wait before applying for a new line of credit.
Having Only Loans or Only Credit Cards
If you have only one type of credit accounts, no matter if it is loans or credit cards, this can ruin your credit score. This doesn’t always count as a negative score, but if you have a short credit history, not having a mix of credit can look badly.