These are good tips for people looking to rebuild credit. You can't begin to raise your score until you know what's hurt it in the first place!
We all worry about keeping a good credit score, but how many of us actually go out of our way to protect our score and avoid certain decisions that could negatively affect it? During our lives we will face numerous financial decisions that could impact our credit score.
Don’t know which actions to watch out for? Avoid these credit killing mistakes and you will certainly improve your credit score.
1. Late payments
Delaying or skipping a credit card payment will hurt your credit score significantly. Place yourself in the place of a lender. If a potential borrower has a history of being late on payments would you want to be lending credit to them? I know I wouldn’t. Never skip a bill. In fact, I recommend automatic bill pay so you never miss a payment.
Whether it is a car loan or college loan, defaulting will wreck your credit score. It’s a very simple concept: You have agreed to a contact and now you are failing to meet your obligations. Result? Default and your credit score plunges and if it’s a secured loan, property may be repossessed in addition. Lesson? Manage your money well and always make good on your debt payments. Ultimately, this simply means only borrow what you can afford to pay back.
With a slumping economy and small businesses going under all around us, bankruptcy is a serious reality for many people. Unfortunately, bankruptcy has a serious negative impact on your credit score. You should seek out alternatives to bankruptcy, because it is extremely hard to get your credit score back to where it once was. If bankruptcy seems to be your only option it could be time to look at negotiating your debt or settle some for a lesser amount. While those also aren’t good for your credit it’s better than bankruptcy.
4. One too many in-store credit cards
I know it’s tempting to open store cards for extra discount this time of year, but try to avoid the urge. Credit agencies will see this as a credit risk and notch your score down. Even if you pay them off immediately, it can be looked at as a negative in terms of “credit worthiness.”
5. Maxing out a credit card
It might appear to be common sense, but people still do it. Again, this goes back to what the creditor thinks about your credit worthiness. Maxing out a credit card is not only foolish, but takes away trust that a creditor has in you. Avoid this by only spending 25% of your maximum credit limit if you can.
6. Closing credit cards
The length of your credit history is a large percentage of your credit score. The longer your credit history, the higher your credit score will be. Avoid closing your oldest card, and only consider closing your most recent cards if you have a reason to close any.
7. Applying for multiple cards
Did you know that each time you apply for a credit card your credit score may be dinged slightly? If you plan on opening multiple credit cards, try to space them out. For example, I will only open two cards a year. I open travel reward cards for the bonus miles, however I keep myself patient and just wait for the next year to open an additional card if a better offer comes around.
8. Charging off an account
If you are regularly very late on payments or start getting too far behind, a lender may “charge off” the account. Basically, a creditor will charge off your account if they think you have no hope of paying back your debt. You can avoid this by living within your means and not getting yourself into a bad situation in the first place.
A foreclosure will also impact your credit score. A foreclosure shows credit companies that you are not responsible with your money and therefore you deserve a lower credit score. Avoid this situation by buying only enough house for your needs and stay clear of home equity loans. Leave the extravagance for your friends.
10. Bad spending habits
This one sneaks up on most people without them realizing it. The basic rule of thumb on this one is to never spend over 25% of your credit limit on a credit card. A portion of your credit score is based off of “credit utilization.” You want to avoid the appearance of irresponsible credit use. Just like having a maxed out card sends a bad message, so does constantly carrying a high balance, even if it isn’t maxed out.
There you go folks, a quick run through some of those most common mistake to avoid when it comes to your credit score. A credit score is connected to so many things in our lives, so protecting it should be a priority. Even getting that next job may depend on it.
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About the Author: Jon the Saver is a personal finance writer at Free Money Wisdom. His mission is to help you succeed in your personal finance life. When Jon is not writing on personal finance, he spends time with his girlfriend, lifts iron at the gym, and plays Scrabble.