Millions of Americans are losing sleep over their steadily increasing debt and decreasing credit score, but what affects your credit score, what things do you need to avoid to stop your score from plummeting? Some of these will be more obvious than others, but all of them are just as important.
We have discussed credit scores extensively on this site, showing you how to build them, how to improve them, and much more. But now it’s time to focus purely on the things that can hurt your credit score, the things you need to avoid at all costs.
1. Limited Credit or None at All
In the eyes of a lender, no history can be just as bad as a history of defaults. A lender wants to know if you are a credible borrower who will meet the repayments. If you have no history of credit then they have nothing to go off.
Don’t assume that you have a great credit score because you have no credit accounts. Credit accounts are a good thing, it is debt that’s the bad thing.
2. Too Many Hard Inquiries
Every time you apply for a loan, a new credit card, or even a checking account, something known as a “hard inquiry” can be made against your credit report. This basically means that the lender has run checks against you to make sure you are a credible borrower, and this is something they will do whether they eventually agree to give you the credit or not.
In the eyes of a lender, a borrower with a lot of hard inquiries is a borrower desperate for credit, and one that could potentially have a lot of new lines of credit on their hands.
A “soft inquiry” may be made instead. This does not leave a negative mark on your credit report, but it will only be made during the application stage and not when the credit is actually being offered.
3. Missed Payments
A missed payment will result in an immediate and damaging mark on your credit report. It is one of the worst things you can do and one of the things that will impact on your score the most.
This is true even when you continue making payments after the missed payment. That mark will remain as a warning to all lenders, and the more missed payments there are, the lower your score will drop and the less chance you will have of ever getting credit again.
A missed payment, known as a “delinquency”, can remain on your credit report for a total of 7 years.
A charge-off may seem like a good thing, but it can have a hugely negative impact on your credit score and your chances of ever getting worthwhile credit.
A charge-off occurs when a lender essentially writes off your debt because they don’t believe that they will ever get the money that is owed to them. This is not something that happens over night, nor does it mean that you can wash your hands clean of that debt.
Charge-offs are often handed over to debt collection agencies. These agencies basically purchase the debt for a reduced rate and then become responsible for collecting it, something they will do by any means necessary. This can also be listed on your credit score as a “Collection”.
So not only is a charge-off damaging to your credit score, but it can also lead to serious issues down the line.
5. Settled Accounts
If a creditor doesn’t believe that you have, or ever will have, the money to pay off your debts then they may offer you a settlement. This is basically a negotiation and it means you can pay a lump sum in order to clear the debt.
A settlement is a great way of reducing your debts, but it will show on your credit report, it won’t look good to prospective lenders and the amount of missed payments and issues that lead up to that payment could result in some damage being done to your score.
If you take out an auto home or home loan and are unable to pay then the creditor may take the possession back and this will show on your report and affect your credit score. When this occurs with a mortgage it is known as a “foreclosure”.
7. No Variation
A good credit score is built off your back of several types of credit, including credit cards, personal loans, home loans and even a mortgage. If all of your debt is tied-up in payday loans or credit cards then it will reduce your credit score.
If your debt is all tied-up in store cards, credit cards or personal loans then consider introducing some other credit. You don’t need to take out massive lines of credit as that will just make a bad situation work, but you can consider adding a secured credit card to a report built on personal loans, or a credit-building loan to a report built on credit cards.
8. Too Many or Too Few Accounts
There is no ideal amount of credit or debt, and lots of lines of credit will actually benefit your score if they have zero balances. This is why it’s important not to close a credit card that has a zero balance, because simply by keeping that card active you are helping to keep your score high.
9. Using Too Much
One of the biggest things that affects your credit score is how much of your total credit limit you are using. If you have five lines of credit totaling $150,000 and you currently owe $140,000 on all of these, the your score will suffer significantly more than if you were using just $10,000 of this, even if you owed money on all accounts.
This is known as a Credit Utilization Ratio and the important number is 30%. If you use less than 30% of all available credit then you should be okay, but if you use more than your credit score may suffer.
One of the biggest things that can negatively affect your credit score is a bankruptcy. You declare bankruptcy when you can no longer pay your debts. It is not an easy way out, and it is by no means a simple process, but if you feel like your debts are too big and you can’t pay for them, then it may be your only option.
Just know that a bankruptcy will hurt your credit score and it will show on your report for 10 years.