Three Ways to Kill Your Credit

Three Ways to Kill Your Credit

Discussing tips and strategies to maintain a positive credit score, and to avoid the common pitfalls!

Banks are becoming even more wary of extending consumer credit - that means your credit score is becoming even more crucial.  Credit scores affect whether you can get credit and what you pay for credit cards, auto loans, mortgages and other kinds of credit. For most kinds of credit scores, higher scores mean you are more likely to be approved and pay a lower interest rate on new credit.  Want to scare off your lender?  Follow these five suggestions and you'll be set!

Closing Credit Card Accounts
 
Closing Credit Cards holds the number one spot on this list - that's right, it has the potential to damage your score worse than Missing Payments.  If there were ever a wolf in sheep’s closing as far as credit mistakes go, it’s this one.  So called “industry experts” such as mortgage lenders suggest that you close credit cards as a strategy to increase your credit scores to qualify for home loans. However, there are two major reasons not to close credit cards that you no longer use:

  • They will eventually fall off your credit reports –Information on your credit reports has to follow certain rules as far as how long it can remain on the report. In most cases credit information will remain on your credit filesfor no longer than seven years from the account’s Date of Last Activity or “DLA.” Your DLA will continue to update each month so long as the account remains open. So, an open account will never reach the seven-year mark because each month your DLA updates to the current month. However, once you close the account your DLA will cease to update and the clock begins ticking. Eventually the account will be removed permanently from your credit reports.
  • You will hurt your “utilization” measurements –This is significantly more important than your closed accounts eventually falling off your credit reports. Revolving Utilization is the amount of your revolving credit card limits that you are currently making use of. For example, if you have an open credit card with a $2,000 credit limit and a $1,000 balance then you are 50% “utilized” on that account because you’re using half of the credit limit. This measurement is almost as important to your credit scores as making your payments on time. If you had a second open, but unused, credit card with a $2000 credit limit and a $0 balance then your aggregate revolving utilization is 25% because you have $4000 in credit limits and $1000 in balances. $1000 divided by $4000 is .25 or 25%.

 Missing Payments

This is an obvious pitfall to look out for - credit scores take into account your credit history to see how you have managed your current and past debt obligations.  This is considered a strong indicator of your future behavior, i.e. missing payments down the road.  Obviously, the most powerful predictor of future late payments is - you guessed it - your past late payments!  There are 2 important ways that missed payments will damage your score:

  • How Frequent Are Your Late Payments?   If you miss payments frequently then you will be penalized much more severely than someone who misses payments infrequently. Missing payments every once in a while indicates that you are a responsible consumer but you may have problems with finding the time to make your payments. Or, perhaps the bill was lost in the mail or you were out of town on travel when the bill came due. The point is that you are not making a habit of missing payments. Don’t start.
  • How Severe Are Your Late Payments?  The severity of your late payment also plays a big part in your credit scores. This not only makes statistical sense but also common sense. Consumers who have missed payments by only a few weeks and then bring their payments up to date are going to score better than consumers who have payments that are 90 days past due or worse. If you have late payments it is in your best interest to do all that you can to bring them up to date.

Settling with your Lender on Past Due Accounts

"Settling” refers to the lender accepting less than the amount you owe on an account.  For example, if you owe a credit card company $10,000 but you can’t pay them the full amount then they will likely make you a deal for less than that full amount.  They have “settled” for less than the full amount, which is likely much less than you contractually owe them.  Although this sounds like a good idea for you, the lender will actually report this to the credit bureaus as a negative item.  This remaining amount is called the “deficiency balance”.  A deficiency balance is considered just as negatively by credit scoring models as any other severe late payments.  If you can arrange a deal with your lender so that they will NOT report the deficiency balance then that will be your best course of action.  If they will not agree to this then you have to figure out a way to pay them in full or your credit will suffer for 7 years.  Be sure yto consider your overall financial situation and the alternatives before spending the time on settling your account.

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