Don’t Let Your Credit Score Fall

Date April 1, 2010

What's your FICO Score

The other day I was evaluating all of the credit I have floating around out there, especially on my credit cards. I do have one card that I really don’t use so, for a brief moment, I pondered cancelling it. Then I remembered that by doing that, my credit score would be affected, and not in a good way.

I ran across this article online and thought I would borrow it to share with all of you. The following are tips on how you can keep your credit score from falling.

Remember: the higher your credit score, the better the rates will be when it comes time for you to get a loan – car, mortgage, or even for a credit card. Plus, due to high volumes of delinquencies and bankruptcies, many lenders are raising their standards on minimum credit scores required to even be considered for the loan.

Most lenders rely on FICO ( Fair Isaac Corporation ) scores when making a decision of whether or not to approve your loan. FICO focuses on five categories when calculating your score: How much debt you have, your payment history, your debt utilization ratio (how much you owe in relation to your credit limits), how far back your credit history goes and your mix of various types of credit.

Read on…and please share.

1. Making late payments

A single late payment on a credit card or other loan could ding your score by as much as 110 points if you already had a great score and 80 points for someone with an average score. So the best thing you can do to improve your score is make payments on time.

Since payment history accounts for about 35% of your total score, it’s really important to start paying on time.

2. Carrying a big balance

Your debt utilization ratio accounts for almost 30% of your score. So carrying too much debt will not only cost you a fortune in interest, it can also destroy your credit rating.

As part of the CARD Act that went into effect last month, credit card issuers must now include a chart with your bills that shows how long it will take to pay off your balance if you only make the minimum payments. The chart will also display how much you need to pay each billing cycle in order to completely pay off your balance in three years.

3. Closing a credit line

Closing a line of credit could impact your debt to utilization ratio.

For example, if you have two credit cards with a limit of $1,000 each and a $400 balance on one card, closing the other account will immediately double your debt to utilization ratio from 20% to 40%.

But the negative effect varies greatly. Closing one card could have a very small impact if you have lots of other high-limit cards. You can also counteract some of the impact by opening up a new line of credit. But beware: that can also impact your score.

4. Opening a credit line

In order to open a new account, a credit card company will need to check your credit, and a typical “hard” inquiry like this will lower your score by about five points, plus the cost of opening a new line of credit typically ranges from five to 15 points.

But the temporary ding only lasts about six months, so if you’re in a stable financial situation, the score reduction could be worth it.

5. Defaulting

Defaulting on a loan is the single worst thing you can do for your credit, said Rex Johnson, founder of credit union consulting firm Lending Solutions Consulting. And given the down economy, more people are damaging their credit scores through foreclosures, credit card charge offs and bankruptcies.

A home foreclosure, for example, might dock about 200 points off your score and a short sale could cost you around 80 to 90 points, said Johnson. Declaring bankruptcy could lower a good score of 750 by up to about 250 points.

While most negative information stays on your report for seven years (bankruptcies can stay on for 10 years), it’s never too late to start rebuilding your credit.

One Response to “Don’t Let Your Credit Score Fall”

  1. Get Out of Loan Debt - Getting out of Debt said:

    […] Don’t Let Your Credit Score Fall | Matadors Money Matters […]