Stones River Realty
| (615) 469-0240 |
| "When It's Time to Come Home"... |
Credit Mistakes
By Aleksandra Todorova
Reporter, SmartMoney.com
EVERYONE MAKES MISTAKES, but those that hurt your credit score should be
avoided at all cost.
All it takes is one little drop in your credit rating to spark a surge of lender notifications
about higher interest rates, lower credit limits and denied applications. Fair Isaac's
FICO score, which most lenders use, rates consumers' creditworthiness on a scale
of 300 to 850 -- 850 being a perfect score. On a $300,000, 30-year fixed-rate
mortgage, someone with a solid score of 700 could snag an interest rate of 5.99%,
translating to a monthly payment of $1,797. Lose just one point, and you'd get a less
favorable rate of 6.27% and pay $19,800 more in interest over the life of the loan.
Ironically, consumers with good credit have more to fear than those who already have
a blemish or two on their record. "The higher your score, the farther it can fall," says
Craig Watts, a spokesman for Fair Isaac. "[One mistake] suddenly puts you in a very
different category of consumer."
To avoid falling from grace, make sure not to make any one of these five mistakes.
Reporter, SmartMoney.com
EVERYONE MAKES MISTAKES, but those that hurt your credit score should be
avoided at all cost.
All it takes is one little drop in your credit rating to spark a surge of lender notifications
about higher interest rates, lower credit limits and denied applications. Fair Isaac's
FICO score, which most lenders use, rates consumers' creditworthiness on a scale
of 300 to 850 -- 850 being a perfect score. On a $300,000, 30-year fixed-rate
mortgage, someone with a solid score of 700 could snag an interest rate of 5.99%,
translating to a monthly payment of $1,797. Lose just one point, and you'd get a less
favorable rate of 6.27% and pay $19,800 more in interest over the life of the loan.
Ironically, consumers with good credit have more to fear than those who already have
a blemish or two on their record. "The higher your score, the farther it can fall," says
Craig Watts, a spokesman for Fair Isaac. "[One mistake] suddenly puts you in a very
different category of consumer."
To avoid falling from grace, make sure not to make any one of these five mistakes.
1. Missing a Payment
Payment history accounts for a whopping 35% of your credit score. The result: "One late
payment drops your score like a rock," says Gerri Detweiler, a credit advisor for
Credit.com. For a consumer with otherwise good credit, the damage could be more than
100 points. Someone with a credit score of 707 who missed payments one month could
see their score drop as low as 582, according to FICO's Score Simulator.
Lenders typically only report the delinquency when your account is 30 days overdue, she
says, but don't relax just yet. These days, some are reporting the missed payment after
just a day or two. To help you get the check there on time, set up automatic bill pay
through your bank account to avoid being late and make sure you allow ample time for
everything to clear. One warning: Automatic bill pay isn't instantaneous and mistakes can
happen while your money is in transit. So make sure to verify that payments have made it
to their destination and have been processed.
Payment history accounts for a whopping 35% of your credit score. The result: "One late
payment drops your score like a rock," says Gerri Detweiler, a credit advisor for
Credit.com. For a consumer with otherwise good credit, the damage could be more than
100 points. Someone with a credit score of 707 who missed payments one month could
see their score drop as low as 582, according to FICO's Score Simulator.
Lenders typically only report the delinquency when your account is 30 days overdue, she
says, but don't relax just yet. These days, some are reporting the missed payment after
just a day or two. To help you get the check there on time, set up automatic bill pay
through your bank account to avoid being late and make sure you allow ample time for
everything to clear. One warning: Automatic bill pay isn't instantaneous and mistakes can
happen while your money is in transit. So make sure to verify that payments have made it
to their destination and have been processed.
2. Maxing Out Your Cards
Spending sprees are as damaging for your credit score as they are for your wallet. The
ratio of debt to available credit accounts for one-third of your score. Ideally, you want to
maintain balances of around 10% of your available credit (so, $1,000 on a $10,000 credit
line), and never owe more than 30%, says Curtis Arnold, founder of CardRatings.com.
"Anything over that is going to adversely affect your score," he says. Maxing out your
accounts could drag a score of 707 down to 637, according to the FICO's Score
Simulator. In addition to spending cautiously, consumers can avoid this slip-up by asking
their lender for a higher credit limit. That automatically lowers your credit utilization ratio,
and can actually improve your score. An even better option: Pay your balances down
before the statement cycle ends, says Arnold. That's when lenders report your
outstanding balance to the credit bureaus, so a big balance -- even if paid off in full a
week later -- can ding your score for the next month. "Right then it looks like you're using
most of your available credit," he says.
Spending sprees are as damaging for your credit score as they are for your wallet. The
ratio of debt to available credit accounts for one-third of your score. Ideally, you want to
maintain balances of around 10% of your available credit (so, $1,000 on a $10,000 credit
line), and never owe more than 30%, says Curtis Arnold, founder of CardRatings.com.
"Anything over that is going to adversely affect your score," he says. Maxing out your
accounts could drag a score of 707 down to 637, according to the FICO's Score
Simulator. In addition to spending cautiously, consumers can avoid this slip-up by asking
their lender for a higher credit limit. That automatically lowers your credit utilization ratio,
and can actually improve your score. An even better option: Pay your balances down
before the statement cycle ends, says Arnold. That's when lenders report your
outstanding balance to the credit bureaus, so a big balance -- even if paid off in full a
week later -- can ding your score for the next month. "Right then it looks like you're using
most of your available credit," he says.
It can be tough to resist the lure of more credit, especially with balance-transfer offers
flooding your mailbox and sales clerks touting the 15% discount for opening a store
credit card. But opening new accounts can have a detrimental affect on your score. Open
just one, and that score of 707 could drop to 697 temporarily, according to the FICO
Score Simulator. Open two or more in a short period of time and the effect is exponential,
cautions Fair Isaac's Watts.
If that's not warning enough, too many of one kind of account creates what lenders deem
an unhealthy mix of credit, he says. Someone with plenty of credit cards but no mortgage
or other secured or installment loans (say, auto or student loans) will have a lower score
than a consumer with a mix that includes each type. In fact, 10% of your credit score is
based on this factor alone.
The lesson: Don't impulsively open new lines of credit and space out your credit-card
requests to minimize the hit on your score. "Only take on new credit when you really need
it," says Watts.
4. Closing Old Accounts
Whatever you do, don't close out old credit-card accounts, warns Scott Bilker, founder of
Debtsmart.com. "It's one of the worst things you can do," he says. Not only does it cut
short your credit history, but it eliminates a portion of your available credit, bringing you
right back to mistake No. 2 -- high balances compared with your credit limits.
Although you shouldn't clean house, do dust off old cards for a purchase or two. Inactive
accounts aren't often calculated as part of your score. Making just one purchase,
however small, every six months keeps those credit cards active. That, in turn, improves
your credit utilization rate and lengthens your credit history.
Whatever you do, don't close out old credit-card accounts, warns Scott Bilker, founder of
Debtsmart.com. "It's one of the worst things you can do," he says. Not only does it cut
short your credit history, but it eliminates a portion of your available credit, bringing you
right back to mistake No. 2 -- high balances compared with your credit limits.
Although you shouldn't clean house, do dust off old cards for a purchase or two. Inactive
accounts aren't often calculated as part of your score. Making just one purchase,
however small, every six months keeps those credit cards active. That, in turn, improves
your credit utilization rate and lengthens your credit history.
Just because you may not be making any of the mistakes above, doesn't mean you can
sit back and let everything go. Some of the things that are most damaging to your credit
score aren't obvious unless you're vigilant about reviewing your credit report. One in four
reports contains a serious error, according to the U.S. Public Interest Research Groups.
On the more sinister side, there might also be damage from identity theft or an old library
fine unknowingly sent to collections. Get your free copy at AnnualCreditReport.com.
(Found a problem? Use our resources for help on fixing errors and fighting identity theft.)
Although you'll have to pay to obtain your credit score, it's worth the $15.95 at
MyFICO.com to check it on an annual basis -- or more frequently if you're preparing for a
major purchase, like a home, says Credit.com's Detweiler. This year, FICO has adjusted
its formula to more widely separate the good lending risks from the bad. As lenders
begin using it early this summer, make sure to request your score to assess the
changes. "Someone who has always thought, 'I have a good score, I don't have to worry
about it,' should check again," says Detweiler.
The new formula no longer includes accounts on which you are an authorized user,
which may hurt the scores of spouses, as well as young credit users piggybacking a
parent's line of credit. But other consumers may actually see their scores rise, thanks to
more lenient late payment and credit request weightings. In that case, you'll want the
score in hand to start calling up your lenders and negotiating for more favorable interest
rates, says Detweiler.