5 Credit Score Killers Every American Should Know
1. Late paymentsThis is the number one enemy of credit scoring. Late payment of the monthly bills affects your credit score and frequent late payments are actually a disaster. This is because, credit rating companies put more stock into your bill payment performance than any other financial behavior. In fact, late payments hurt your credit score more than the other culprits on this list combined. That’s important because your credit score first tells lenders if you are a credit worthy borrower or not. If you are not paying your bills on time or are missing payments completely, your credit score will be adversely affected. So it is crucial and essential to pay your bills on time and fully. Meaning, do not just pay the minimum balance due.
2. High Balance AmountThis is not as important as your payment history but it does weigh on an individual’s credit history. Foreclosure of large amounts of debt on your credit report is a definite red flag for lenders. They are very interested to know that you can manage the amount of money you want to borrow. Therefore, credit rating companies will penalize if you borrow more money than you can comfortably afford to pay. It is definitely not a good idea to run large balances on your credit cards. That’s a sure sign for lenders that you may not be able to handle any new credit. If you want a better credit score you need to keep your debt to income in balance.
3. Lack of Credit HistoryYou cannot get a job without having a resume describing your work experience (at least when you are applying for a position requiring relevant experience). Similarly, a credit resume is needed that will illustrate your experience with credit. That’s what credit history is, it is your credit resume. If you are an experienced borrower your credit history is important, and if you are a novice you are crucial. Of course, this leads to the proverbial dilemma of how to prove that you are credible with a limited credit history. One answer may be to pull out a secured credit card and build your credit with it.
4. Excess of new creditMoney loans come with a lot of responsibility and lenders want to see that you handle your credit carefully. If you are constantly applying and using new lines of credit, your credit score will be negatively affected. By doing this frequently, the time will come when you will no longer be given credit. You should resist most credit card offers, taking only those that are vital to your financial strategy. Try to avoid applying for and using too many store credit cards to take advantage of in-store discounts.
5. Having too little creditTo get a high credit score you need to have a mix of different types of credit: credit cards, a car loan, a mortgage loan and even a personal loan is taken into account. How many of these credit score killers are currently at large in your financial profile? Take steps now to put them behind bars and you’ll quickly see your credit score go up.
This article has been written by Chandra Mehta.
Chandra is a seasoned banker with 20+ years of experience in banking and financial services industry. He’s a retired banker and has served as Chief Manager and Assistant Vice President in State Bank of India/or its subsidiaries.
He has authored many articles on this site (allonmoney.com).