I know I’m not surprising anyone when I tell you that your credit score is a good indicator of how you’re doing financially. It’s not always a completely accurate diagnosis, but if your score lies below 700 you have some work to do.
Here are some general guidelines to credit health:
- Above 750 – You have a financial six-pack
- 700 – 750 – You’re feeling good and are most likely whistling right now
- 640 – 700 – Stay on top of your symptoms…a cold could be coming
- 581 – 640 – You’re definitely sick. Make a doctor’s appointment ASAP.
- Below 580 – Yikes! It’s time for emergency surgery.
Without further ado,
4 easy ways to destroy your credit score:
1. Toss your bills on a desk/table/pile and get to them when you feel like it
As you know, avoiding late payments is the single best way that you can keep your credit score up where it belongs. What’s the best way to pay your bills on time? Organization!
If you’re anything like me, it’s far too easy to toss the bills into that ever-expanding pile on your desk. You’ll get to them “later”, right? Don’t believe it. Yes, most of the time you’ll get to them before the due date, but even ONE 30 day-late payment can sink your score up to 100 points or more!
Don’t trust your memory. Pay your bills right away.
2. Keep your credit cards maxed out
This is a bad idea for more than just your credit report. If you’re maxing out your credit cards, it means that you’re not paying them off each month, which means you’re wasting money left and right. In fact, according to consumercredit.com, a $10,000 credit card of which you only pay minimum payments will most likely take you 25 years to pay off and will cost an additional $12,000 in interest! Don’t do it!
Besides the obvious reason for not maxing out your credit cards, your credit score also takes a hit if your available credit is too low and the balances too high. It’s called utilization – the ratio of balances owed compared to the credit limits. The higher your utilization ratio the more your credit score dips.
For example, let’s say that you have only 1 active credit card and it has a $10,000 limit. If you routinely have a balance of $5,000 your utilization ratio would be 50% – not good. If you only have a $1000 balance, however, your utilization is a much more understandable 10%, and your credit score rises. Just one more reason to pay off your debt as quickly as possible.
Most experts will tell you to leave your accounts open once you pay off a credit card. Zero dollar balances obviously help your utilization ratio quite a bit. While this is sound credit advice, if you continually keep your credit cards paid off anyway, it’s not really necessary to have 7 or 8 open credit card accounts. I only keep 2 credit cards open and my score is in the high 700′s. On the other hand, if your balances are on the higher end, don’t close out the cards you pay off until the total picture looks a little better. In the mean time, DON’T USE THEM.
3. Never have a single item of debt – EVER
You need a history. Even a short history will do, but there has to be something there. I’ve run multiple credit reports on Amish business men whose credit score is “N/A”. Why? Because up until that point they had never financed anything. That makes it difficult for banks and mortgage companies to figure out whether they’re a credit risk or not. They didn’t have any history that gave the bank a hint.
This is also why college students often have a difficult time borrowing money for a car or getting a decent credit card (besides their lack of income, that is).
4. Never check your credit report
There’s plenty of funny stuff going on out there. Well…maybe “funny” isn’t the right term. Over 10 million people each year are affected by identity theft, and the number continues to grow each year. Checking your credit report is one way to protect yourself, along with the more immediate responses of paying close attention to bank accounts and credit card statements.
Also, sometimes credit bureaus just make mistakes – I know, I can’t believe it either. About 8 or 10 years ago, when I was still spending far too much cash, I ended up paying my mortgage over 30 days late. It, of course, ended up on my credit report. I deserved it.
However, the previous owner of the home – a friend of mine – also was hit with a late payment. However, he hadn’t owned the house in months. The stain remained on his report until he applied for a loan years later and noticed a much lower score than he was prepared for. Fortunately, mistakes like that are often fixable with a letter or a phone call, but if you never know, you’ll never do anything about it.
Once a year you’re able to check your credit report for free at annualcreditreport.com. According to the Federal Trade Commission, “annualcreditreport.com is the ONLY authorized source of the free annual credit report that’s yours by law.” There are MANY websites that promise a free credit report, but be careful, because many of them require you to sign up for a “free” trial that will cost you dearly if you fail to cancel.
Annualcreditreport.com allows you to make sure everything looks as it should, but the credit score is unfortunately absent. If you want your credit score, you’re going to have to sign up for one of those “free trials” we were talking about. However, even without the actual score, the site is still a good tool since it allows you to review your report and make sure everything is as it should be.
Check your report once a year, or better yet, check 3 times a year instead. Since there are 3 separate credit bureaus, you can spread out your free reports throughout the year by ordering them separately 3 or 4 months apart. In other words, when it gives you the choice of which report(s) you would like to view, only order one (like Experian) and then come back 3 or 4 months later and order another one. You technically get free reports from all 3 bureaus each year, not just one.
Also, don’t be afraid to ask your lender what your score is next time you apply for a car loan or mortgage.
With all that being said, remember that credit scores are not perfect indicators of your financial health. They’re just one tool. I know people who are in perfect financial health that don’t have perfect credit scores because they have too little debt or too little credit. Not to mention, you could be on the brink of bankruptcy and still hold a decent score as long as you’re currently finding a way to pay your bills on time.
However, most financial institutions don’t necessarily see it that way and rely rather heavily on that silly 3-digit number. Approvals, denials, and interest rates often hinge on credit scores (especially with large banks who don’t know you from Adam).
So, next time you just toss your bills in the pile, pick it back up, get the checkbook out, and take 20 seconds to protect your credit score.