If you ever question the importance of your credit score, talk to someone who’s been turned down for a loan or failed to land a job or apartment because of a low score. Your credit score plays a huge financial role in your life, which means you should avoid the mistakes that can destroy it.
Many consumers have personal experience with this problem. A recent GOBankingRates survey of 1,021 U.S. adults found that more than one-third of respondents (37.2%) have been negatively impacted by a low credit score.
For those who have seen their credit scores sink, a variety of credit-building tools are available that can build your score back up. One of them is CreditStrong’s Revolv, which helps lower your credit utilization and increase on-time payments — key parts of your overall score.
The best strategy is to not get stuck with a low score to begin with. A good place to start is by understanding what goes into a credit score. The two main credit scores are the FICO score and the VantageScore, though the FICO score is the preferred choice of most vendors. Here’s how FICO scores break down, from best to worst:
- 800 or higher: exceptional
- 740-799: very good
- 670-739: good
- 580-669: fair
- 579 or lower: poor
The higher the score, the better your chances of being approved for a loan — and for getting favorable loan terms. Your chances of getting approved fall dramatically for scores below 670. If your score is 579 or lower, you’ll have a hard time getting approved for anything unless you put down a deposit or find a co-signer.
FICO lists five factors that contribute to your credit score, each of which is weighted differently:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
A sure way to destroy your credit is to be reported as delinquent. If you’re 30 days past due, your credit score will get dinged, and it snowballs from there the longer you stay delinquent. Because payment history accounts for such a large part of your score, any late payments on your history cause the biggest damage to your score.
You can also destroy your credit by amassing massive piles of debt. At worst, you’ll have to file for bankruptcy if you can’t pay the debt off, which will ruin your credit. Even if you don’t have to go to that extreme, increasing your debt will also increase your credit utilization ratio, which measures the percentage of your total credit vs. the total credit available to you. As your ratio goes up, your score goes down.
Here are the four fastest ways to destroy your credit.
Not Paying Your Bills on Time
It’s impossible to overstate the importance of timely payments when it comes to your credit score.
“Making a late payment has a large immediate negative impact on your credit score,” said Erik Beguin, founder and CEO of Austin Capital Bank, which offers a family of credit-building products through its CreditStrong division.
Once a payment is 30 days past due, the creditor reports it as a late payment and it stays on your credit report for seven years, Beguin said. While you may incur late-payment penalties for paying your bill several days late, you won’t harm your credit score until you hit that 30-day mark.
The best thing you can do is to make on-time payments to your credit card bills and loans. You can avoid late payments by setting up payment reminders or enrolling in autopay.
However, if your credit score has already dropped due to late payments, there are effective strategies you can use to build it back up.
For example, a credit-builder tool such as CreditStrong’s Revolv can give you the benefits of revolving credit without the risk of going into debt. In simple terms, it’s basically a savings account that gets reported to all three major credit bureaus as a credit account. Your monthly savings payments count as on-time credit payments, and CreditStrong will increase your “credit limit” over time, helping you achieve the ideal credit utilization level.
Maxing Out Your Credit Cards
Running your credit card balances to their limit can destroy your credit score in a hurry, according to the Credit Counseling Society. This is the case even if you pay your bills on time.
When you max out your credit cards, it tells credit rating agencies that you either have a lack of funds to pay your bills or you’re reckless with money. The best way to avoid this is to only spend as much on your credit cards as you can afford to pay in a month. Paying your credit card bill in full each month can improve your credit score and help you avoid interest charges.
Putting In Too Many Credit Applications
Whenever you apply for credit, the lender or card company runs a hard inquiry to determine whether it will approve you for a new account. Inquiries make up 10% of your credit score and each one has the potential to lower your score.
“One of the fastest ways to destroy your credit [is] to take out a lot of credit all at once, which maximizes the credit utilization ratio,” said Sebastian Jania, owner of real estate investment and solutions company Ontario Property Buyers.
And as Experian noted, applying for too much credit at once suggests you’re “financially overextended and more risky to lenders.” You can avoid this by only applying for credit when you need a specific type of loan.
Closing Too Many Accounts at Once
Just as applying for too much credit can ding your score, so can closing too many credit accounts too quickly.
First, it reduces your available credit, which could increase your credit utilization ratio. Closing accounts can also shorten your credit history — especially if you close an older account. And depending on the type of account you close, you could weaken your credit mix, which represents 10% of your FICO score. If you want to close an account because of expensive annual fees, see if your lender can offer other options without the fee.
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