I write a lot about how many first-time buyers can probably qualify for more of a loan than they think. Applying for a home loan can be intimidating and many people that want to buy put it off, and put it off because they just don't know how to take the first steps, or think it's more complicated than it really is. Well, what if you don't qualify for everything you hoped - or - you know that homeownership is in your future, but while you're waiting those couple of years to get to that place, might as well work on your credit to get a better rate, right? YES! So, while you're stacking that cash for your down payment or doing some damage control, here are some habits to STOP while trying to improve your credit.
7 Ways You're Ruining Your Credit
By: Lauren Gensler
You know your credit score is important, but are you clued in on what you might inadvertently be doing to sabotage it?
This three digit number acts like a grade for your financial life and is calculated based on the information in your credit reports, like your history of paying credit card bills and taking out loans.
Lenders use it to determine your eligibility for mortgages, car loans and credit cards, plus how high of an interest rate you’ll pay. Your reports can even be pulled by prospective landlords or employers as they evaluate you for an apartment or job.
A FICO score, which is used by the vast majority of lenders, ranges from 300 to 850. Anything above 780 is considered very good and anything below 600 is considered fair to bad.
Here are some of the top credit score killers:
1. Paying bills late: Your history of making payments is one of the most important factors that goes into your credit score, whether it’s for a credit card, student loan or mortgage. It’s the first thing a lender wants to know, says Fair Isaac Co., which produces the FICO score, and composes about a third of your score. By slipping up and failing to pay your bills on time, your score gets dinged.
With that said, don’t assume that just as long as you make payments on time every month you have perfect credit, says John Ulzheimer, credit expert and president of consumer education at CreditSesame.com.
2. Not paying bills at all: It’s devastating for your credit score when you start missing payments entirely (say, you lost your job and can’t afford your mortgage) and they get sent to collections. A collection listed on your credit report will typically remain there for seven years, regardless of whether you pay it off later or not. (That’s right, an unpaid collection is no worse for your score than a paid collection.) With that said, generally the older a collection is the less it will hurt your score.
If you get to the point where you’re forced into foreclosure or bankruptcy, that’s particularly catastrophic and can easily knock 100 points off your score.
3. Maxing out your credit card: If you have a $10,000 limit on your credit card, that doesn’t mean you should charge that much every month. In fact, experts say your credit card balance should never exceed 30% of your credit limit, and ideally it should stay below 10%. That means no more than $3,000 should ever be put on a card with a $10,000 credit limit.
It doesn’t matter if you never exceed the limit and you’re religious about paying your bill in full every month. The fact remains: Amassing big balances on your credit card, relative to your allowance, is harmful to your score.
With that said, there are a few tricks you can employ to spend as normal and take full advantage of credit card rewards, without putting your credit score in harms way.
For one, “you have ultimate control over the balance that’s reported to credit bureaus,” says Ulzheimer. Your balance is only reported once per month, which means you can pay down your credit card bill beforehand so it appears low when it’s passed along to the credit bureaus.
The balance that’s reported is typically the one on your monthly statement, so figure out when this hits your mailbox and pay well in advance. Call your credit card company to check.
Just “don’t play chicken” with your bill, says Bill Hardekopf, CEO of LowCards.com. Your best bet might be to make credit card payments multiple times a month to ensure your balance is always low. Or if you make a big purchase, say a $1,500 flat-screen TV, go home and pay it off right away.
You can also try to boost your credit limit, either by requesting a higher limit on your existing card or signing up for another credit card. Your total credit limit rises with each additional credit line you’re extended.
4. Thinking you don’t have to pay if an item is in dispute: You’re expected to pay your credit card bill every month, even if you’re challenging an item on your statement. Were you charged for a catering job you thought was subpar or hotel parking you thought was free? Shipped a defective product? By all means, fight for a refund with the merchant and call up your credit card company to tell them you’re disputing the charge (they’re supposed to designate that charge as pending.) But then pay your credit card bill.
Just because you’re disputing one item doesn’t mean you’re suddenly off the hook for paying the rest of your bill on time. A late payment is a late payment as far as your credit score is concerned. “Lose the short-term battle, but win the long-term war,” says Ulzheimer.
5. Co-signing: When you co-sign a loan for a relative or friend, you open yourself up to blow-back from any bad activity that happens down the road.
“It’s like saying, ‘A bank won’t touch you by yourself, but for some reason I trust you and I’ll put my credit reputation on the line,” says Ulzheimer.
The loan will show up on your credit reports, almost as if it’s yours, and any missteps like late or missed payments will negatively impact your credit score. While it could make for an awkward conversation at the dinner table, you have to consider the worst case scenario before signing on the dotted line. Imagine if your son suddenly can’t make payments, and you’re faced with making them yourself or accepting the hit to your credit score.
6. Taking on too much credit at once: You shouldn’t be opening a lot of accounts in rapid succession, especially if you’re younger and don’t have a long credit history. “It’s a red flag that something is going on,” says Hardekopf, because it indicates to a lender that you might be in financial trouble and grasping for credit.
Plus, every time you apply for a new credit card or loan, a lender makes something called a “hard inquiry” to check you out. This can ding your credit score, although if it does it probably won’t be by much. Or for long. Inquiries aren’t factored into your credit score after 12 months have passed.
7. Shunning credit: While it may seem counterintuitive, steering clear of credit and debt isn’t the responsible thing to do either. When it comes time to buy a house or a car, and you don’t have enough cash on hand to do so, the bank you approach for a loan will assess your risk. Do you have a squeaky clean past or skeletons in the closet? If you’re a credit hermit, you’ll have little to show either way.