We all know that having a good credit score is essential, especially for big life purchases and events. Your credit could be the deciding factor in getting approval for loans, mortgages, housing applications, and more. While we all try to maintain and increase our credit scores, there are things we might do that can ruin our credit quickly. Here are 5 ways you might ruin your credit score—and some advice on how to reclaim it.
Missed / Overdue Payments
Missing deadlines like a missed payment for loans or credit cards has more effect than most people know. When your statement is released, you have 21 days to make a payment towards the balance; whether that’s paying off the full amount, paying down some of it, or making the minimum payment. After those 21 days, you will have to pay interest on the remaining balance.
A payment that’s overdue or below the monthly minimum requirement can begin to negatively affect your credit score in as little as 30 days after the original due date. Once a payment is 30 days overdue, the bureaus that determine your credit score will be notified. Missed or overdue payments can remain on your credit history report for the next seven years, which will make it harder for you to get approved for future loans, credit, and even housing. Just as every on-time payment is beneficial to your credit score, every missed or insufficient payment is detrimental to it.
Carrying Too High of a Balance
Most financial experts agree that carrying a high balance is not recommended, particularly on credit cards. Carrying any balance on your credit cards changes your credit utilization ratio (the amount of credit you have available compared to the amount you have used), but carrying a high balance is where things get problematic. The more of your available credit you spend, the more your ratio increases. A high credit utilization ratio will cause lenders to see you as “risky” as you might have a more challenging time repaying what you owe. It is recommended that you keep the amount you owe to less than 30% of your available credit to maintain a lower credit utilization ratio. Having a higher ratio will cause your credit score to fall.
Undiversified Credit Mix
Ideally, you’ll have multiple sources of credit. Not having a diverse credit mix is a missed opportunity to improve your credit score. Credit mix makes up 10% of your credit score. While it’s not a large percentage, if you are looking to reclaim your credit score, every bit counts! For example, if you only have one credit card, this won’t negatively impact your credit score, but it won’t add to it. Having multiple types of credit including installment (loans) and revolving accounts (credit cards) in good standing demonstrates to lenders that you can handle managing them which positively affects your credit score.
Too Many New Accounts at Once
That said, don’t go opening a bunch of credit lines all at once—every time you apply for a new line of credit, the lender will check your credit report, and your credit score will temporarily decrease slightly as a result of that “hard inquiry.” A hard inquiry is when potential lenders take a detailed look at your application and credit history. Too many hard inquiries in quick succession, and those small decreases will add up. Some credit card companies have even put rules in place prohibiting you from opening too many lines of credit in a given period.
Being a Co-Signer
Co-signing a loan can be risky, even when it’s for someone you’re close to. Co-signing isn’t inherently harmful to your credit, but things can go downhill fast if the person you co-sign for becomes unreliable. As the co-signer, it is your responsibility to ensure that payments are being made if the primary signer fails to do so. If both of you fail to make payments, both of your credit scores can take a hit.
Reclaim Your Credit Score
If you’ve stumbled into one or more of these common credit pitfalls and your credit score has declined, reclaiming your credit can sometimes feel like you are swimming against a strong tide, and not making any headway.
But there’s always hope! Here’s a few steps you can take right now to improve your credit score:
Paying your bills on time
You can begin by paying your bills on time, every month. Just as a high credit utilization ratio lowers your credit score, taking steps to reduce your credit utilization will help increase it.
Opening new lines of credit (within reason)
If you have a small number of credit accounts, you will lower your credit utilization by opening new credit accounts, which should improve your credit score—only if you don’t increase the total credit balance you owe.
Consolidate with a personal loan
Another option is to consider taking out a personal loan to help consolidate your debt. While you’ll still have to pay that loan over time, a personal loan usually carries a lower interest rate. This would allow you to pay down debt from higher interest rate credit card accounts with a lower interest rate personal loan, saving you money. Taking out a personal loan to consolidate credit card debt can help improve your credit score in three key ways:
- By lowering your credit utilization,
- By diversifying your credit mix, and
- By using the cash saved from lower interest fees to accelerate paying down your debt.
Credit Direct specializes in securing such personal loans. If you reach out to us, we can help determine if such a personal loan is an option for you.