Your credit score is a critical factor lenders use to decide whether they’ll risk loaning you the money for major purchases such as an automobile. Did you know that some of the things you do that you think might improve your credit score actually cause it to take a nosedive? Here are five ways we destroy our credit score without even knowing it.
#5 – Letting Library and Other Minor Fines Languish
Image via Flickr by koocbor
You might think that not paying library fines or traffic tickets is no big deal, but a growing number of municipal governments are sending these unpaid fines to collection agencies. A whopping 35% of your FICO score is based on payment history, and having an account in collections means you haven’t made one in a very long time. The result is a significant drop in your credit score. It makes sense, therefore, to pay these fines as soon as you get them.
#4 – Closing Credit Card Accounts with Zero Balances
Don’t close those old credit card accounts you rarely use. They establish your credit history over a long period of time. Getting rid of them will negatively impact your payment history and cause your credit score to drop.
#3 – Not Using Your Credit Cards
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You also want to use those old credit cards from time to time. If a lender views an account as “inactive,” it may decide to close it. Now you have less credit available, and this negatively affects your credit utilization ratio, the amount of credit available versus the amount owed, as well as your credit score. Shoot for a credit utilization ratio of 25%, that is, the amount owed on your accounts is 25% of your available credit. Use these accounts sparingly, however, and be sure to pay them off in 30 days.
#2 – Consolidating Debt
Consolidating several credit card balances into one consolidated loan may make it easier for you to pay off the balance, but it can also cause a drastic drop in your credit score. The reason is twofold. First, to determine your credit-worthiness, the consolidation company makes a “hard inquiry” on your credit report. Too many of these over a short period of time can result in a slight dip in your credit score (see #1 below).
More importantly, the potential is great that you will start adding to the balances of those now empty credit cards. Add in that huge consolidated loan you just received, and you’ll end up owing even more money, resulting in a hefty drop in your credit score. If you’re in this position already and want to buy a car, car loans for bad credit may be what you need to look for.
#1 – Making Too Many Credit Requests
Image via Flickr by Kaiyan
Finally, don’t make too many credit requests before you need to make a major purchase that requires a loan. Even though inquiries on your credit report account for less than 10% of your FICO score, you might give lenders the impression you are strapped for cash, and they will consider you a credit risk.
Your credit score is a precious commodity. Take steps today to keep from unknowingly damaging it.
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