by Susan Tiffany, CCUFC, article originally appeared in Home and Family Finance
It’s a fact of financial life that if you want to borrow money, your lender will look at information about your credit habits before deciding how to price the loan.
If you’re a good risk, you won’t have to pay as much interest for the privilege of borrowing. If you’ve been a credit screw-up, expect a lender to charge you more. That’s only fair, not only to the lender but to other borrowers the lender serves. It wouldn’t be right to expect responsible borrowers to subsidize careless borrowers.
This is where your credit score comes in. It’s a three-digit grade for your credit behavior to date. It changes all the time, based on your improving or deteriorating credit habits.
Some of the ways you can damage your credit score are pretty clear, while others might surprise you.
Obvious credit missteps
No surprises here, but it’s worth reviewing habits that will trash your credit score:
- Being careless about paying bills on time—An occasional slip likely won’t hurt too much. But a pattern of letting due dates slide, even if you catch up eventually, will take a toll.
- Not bothering to pay bills at all—If that slippery slope of late payments turns into outright default, the damage to your credit score ratchets up.
- Maxing out your credit cards—You might think it’s OK to carry high balances as long as you keep up with minimum payments, but not true. One element of your score is credit utilization, or the percentage of your available credit in use. Say you have three credit cards with a combined total limit of $10,000, and you owe $9,500 among the three. Your utilization is 95%, a number that will seriously damage your score.
The antidotes to these problems are straightforward: Always pay all your bills on time. Make this easy by setting up automated minimum payments for your loans and credit cards.
And it might take longer to accomplish, but get your credit utilization to less than 25%.
Your payment history, combined with your total debt, accounts for two-thirds of your credit score, so these three big factors require serious attention.
Not-so-obvious credit errors
Even if you clean up your payment act and pay down your total debt, you still can lose cred with other behaviors:
- Closing old cards or cards with balances— These actions sound like prudent behavior if you’re trying to curtail credit use. But think of your oldest friend and a friend you’ve met only recently. You likely trust the old friend more simply because you have a longer shared history. Your new friend could prove just as trustworthy, but only time will tell. In that vein, your length of credit history counts for 15% of your credit score. And closing a card that still carries a balance will hurt that key credit utilization segment of your credit score, because it reduces your total credit limit while raising the overall percentage of credit in use.
- Applying for several credit cards or loans—If credit utilization is an issue, it would seem to make sense to increase your overall credit limit by expanding the number of cards or lines of credit you can access. Not so. This makes it look like you’re in trouble financially and trying to supplement your cash flow with credit. The credit scoring models make allowances for times when you’re making several credit inquiries to find the best interest rate, for example when you’re buying a house or a car. A flurry of inquiries in a few weeks that relate to that kind of purchase won’t harm your credit score.
- Having too few kinds of credit—This sounds contradictory, doesn’t it? All it means is that lenders like to see you have diversified your credit sources—say, a few credit cards, a car loan, a mortgage—and handle them all responsibly. You don’t acquire this mix of credit all at once, of course, but over the span of a few years or more. New credit and your mix of credit each account for 10% of your credit score.
Talk to a credit union loan officer about your credit score and ways to safeguard your credit standing.
Why it matters
You know that your credit score influences what you pay for loans and credit cards. If that’s not enough motivation to keep your score in good shape, know that it also affects other significant slices of your life: Jobs, housing, and insurance rates. A potential employer, landlord, or insurer could use information based on your credit history and score to decide whether to hire you, rent to you, or insure you.
You can check your credit report—the summary of your credit activity that generates your credit score—from each of the three major credit reporting agencies once a year for free. Always make your requests from the annualcreditreport.com website, the only site sanctioned by the Federal Trade Commission. Or, you can call 877-322-8228.
Make one request every four months in rotation among the three credit agencies so you can monitor your credit report year round.
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