Ryan Guina is an entrepreneur and writer. He has worked for Fortune 500 companies and served six years in the USAF. He writes about money management and small business topics at Cash Money Life and military money topics at The Military Wallet. You can follow his twitter feed.
Like it or not, your credit score is important. It is used by lenders to determine your eligibility to get a loan, the interest rate and terms you may be eligible for, and it can even be used as a screening device by landlords, employers, and cell phone companies.
To put it a different way, a good credit score can save you thousands of dollars over the life of a loan, or even hundreds of thousands of dollars on a mortgage. A bad credit score can cost your thousands more in interest payments, preclude you from getting a loan in the first place, or even prevent you from finding a place to rent.
Five Things You May Be Doing to Unwittingly Sabotage Your Credit Score:
- Declare bankruptcy. This is the worst of the bunch, and will remain on your credit report for a minimum of seven years.
- Don’t pay your bills. An obvious one, but you would be surprised how many people just skip a month or two. Your payment history makes up 35 percent of your credit score. Pay your bills on time, and you are 35 percent of the way to a good credit score.
- Charge too much. Again, it seems like a no-brainer, but some people believe that if they are approved for a credit card of loan, then they can afford it. The truth is that lenders will offer you loans that far exceed your capacity to repay them. The amount of money you borrow accounts for 30 percent of your credit score.
- Open a bunch of new accounts and/or close old credit accounts. Lenders want to see a history of you being able to repay any loans. Length of credit history makes up 15 percent of your credit score, and new credit makes up 10 percent of your score. Close some old accounts and open new accounts and your score may take a hit. (here is recommended reading on how closing credit cards affects your credit score).
- Open the worst types of credit accounts – payday loans and store credit cards. The type of credit you utilize is important to lenders because it offers insight into your spending habits, and more importantly, classifies you into a demographic of who repays loans, and who doesn’t. The type of credit you use makes up 10 percent of your credit score. Of these, secured installment loans such as a mortgage and auto loan are better than unsecured credit loans at the bottom of the scale, such as store credit cards and payday loans.
Your credit score isn’t just an arbitrary number — it is based on an algorithm that uses information from your personal credit history. The longer you pay your bills on time, and the better your credit utilization and types of credit you take out, the better your credit score. And that can save you thousands of dollars over your lifetime.