Thursday, December 20, 2007

6 Ways to Destroy Your Credit Score

In the day and age that we live, the financial powers that be have more control over your future than ever before in history. It is really important to understand the impact of credit scoring (FICO - The Fair Isaac Credit Organization scoring system), how it is done and how to maintain the best scores that you can. This article is targeted at just that, to give you the consumer some major ways to boost your credit scores and in turn, make sure that you get the best rates and opportunities for you and your family.

There are six major ways that you can effect your credit score for the worse. These are:

1. Spend big money at the wrong time - Be aware that any purchase on credit, once it finds its way to the reporting agencies will reduce your credit score. Usually 1 percentage point of used credit will drop your score by one point. So if you have an open account with $1,000 in credit available, and you make a $400 charge on that account that rolls as a balance to the second month, this can mean a drop of 40 points in your credit score! This works on available credit vs. used credit, so just work to keep you carried balances under 30% of credit line numbers. This should minimize the impact of carried balances on your accounts. Best of all, keep zero balances on all your accounts to maximize your FICO scores.

Also you may want to restrict your active use of credit for 60 days prior to a major purchase or financial event. Remember that credit scores can affect you in many ways, not just applying for credit. Many companies also review your credit scores before offering you a job. Insurance is also often quoted based on credit scores, so these numbers matter in many areas of a consumer's financial life.

2. Being Late on Any Credit Payments - This habit can really hurt your scores severely! Many experts believe that for every bill you have that goes over 30 days late, your credit score can take a 60 point hit! Paying on time DOES matter! If you have late payments on your record from the past they will be less and less impacting over time, but will probably still effect your score 15-20 points for a long time to come.

You may want to consider setting up an auto-pay system to pay from your bank every month. This will keep you from missing a payment and you can set up these scheduled payments for the minimum amount and pay more by seperate payment if you can afford to every month (in fact, pay the balance off now if you can!).

3. Being Too Conservative With Credit - You may have been taught to be conservative in finances, but when it comes to credit this can affect you negatively. The more extensive your credit history, the better. Your scores will reflect this. So if you have a small or limited credit history, it may be a good idea to apply for a credit card or two and for an auto loan (just do so with caution and don't go on a "credit binge"). Also make sure to keep minimal balances (or better yet, zero balances) on as many as you can. Creditors like to see that a borrower has a history at managing several credit accounts and that they don't have a tendancy of charging every credit line up to the maximum as soon as they are granted them.

4. Be Overly Aggressive in Building You Credit When Young - This will sound like a contradiction with my last point; however, creditors also look at the length of time that a user of credit has managed credit accounts successfully. This makes it a little tough when a young person is trying to get credit established. You need to apply for a few accounts and manage them well over long periods and your score will get much better over time. You CAN do this as a young person, but remember "Rome wasn't built in a day" and neither can your credit score so be patient.

5. Get Over-anxious Closing Older Accounts -Once you have several years of credit history built up and you look at your credit reports, you may be tempted to close a bunch of accounts that you haven't used in years. My advice is, RESIST THAT TEMPTATION! Another thing looked at closely in credit scoring is the total outstanding credit vs. credit balances. These ratios can strongly effect your scores. For instance, say you have six credit cards with limit totals of $54,000 on them. You happen to be carrying a balance of $16,000 presently making your credit usage ratio approximately 29%. You are carrying that balance on two cards and you decide to close the other four accounts to keep your record tidy. Your remaining limits on the two cards are $25,000 and now your ratios have jumped to 64% and your credit scores dropped 50+ points! The point is, be very careful with being too organized in cleaning up your record.

6. Be Unaware of Your Current Credit Records - The credit reporting agencies are less than perfect in reporting most people's credit histories. Often when you check your reports, you will encounter other people's credit "problems" associated with your credit history. You need to regularly (at least once a year), keep an eye on your reports and keep the reporting agencies honest. Be a good reviewer of your credit history. This discipline will serve you well when you need to use credit.

Thanks for taking time to read my rant on credit scores - I hope it has been a help to you. In our real estate business, we come up against clients every day who have not been actively managing their credit. This is such a critical part of your financial well-being, that we encourage your to get involved TODAY. If we can help you in any way, see our website at: or call our office at (512) 439-3772.

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