Surprisingly enough, ruining your credit score does not usually happen overnight. It’s common to make multiple poor decisions that add up to destroy your credit. It is often due to the lack of information and confusion surrounding credit scores that lead people down the black hole of credit depreciation.
Once your credit is on the decline, you are even more likely to make these mistakes. I’ve compiled a list of the most common errors that will ruin your credit and the reasons why you should avoid them. It is much easier to protect your credit than to fix it.
1) Co-Sign for Someone Else
It can be hard to avoid co-signing for a family member because you will want to find any way that you can to help them. It’s natural to want to make their lives easier and aid your loved ones in buying a house or car. While your intentions are good, this is incredibly risky.
When you co-sign a loan, you are just as responsible for it if the other party defaults. If you help a family member get a loan for a house or a vehicle and they stop making payments, the property will get repossessed. Your only two options at that point will be to take over the loan and make the payments, or the repossession will go on your credit report (for seven years, yikes!), and it will be sent to collections.
Pro Tip: If someone is asking you to co-sign, they cannot afford the loan independently. Whether it is from a lack of funds or a bad credit history, there is a reason that they can’t attain that credit line. There is considerable risk involved if they don’t make their payments, and it is not worth ruining your credit.
2) Max Out Your Credit Cards
It’s easy to forget that you have to pay back every penny borrowed, including interest, when you first receive a credit card. If you get a card with a $5,000 credit limit, it’s tempting to spend all of that money. However, just because they offer you the limit does not mean you need to max it out.
Credit utilization has a substantial impact on your credit score. The more utilization, the more your score will drop. Paying balances and keeping them low will instantly improve your credit score.
Pro Tip: Your credit utilization should be no more than 30%, and I advise clients no more than 10%. You should only use your credit card if you already have the money and intend on paying it down to build your credit. Never carry a balance unless you want to pay interest. Your emergency fund should be a savings account, not a credit card.
3) Apply for More Credit
Every time you apply for more credit, it will result in a hard inquiry. Hard inquiries can cause a 15 to 20 point credit score decrease. While a few over many years might not seem like a big deal, it can actually have a significant impact on your overall score.
If you are hoping to make a large purchase soon, like a house or a car, applying for more credit can be harmful. The more hard inquiries there are, the riskier you will seem to the lender. The chances of receiving a house loan decrease each time an inquiry is requested.
Pro Tip: Hard inquiries make up 10% of your credit score and stay on your credit report for 24 months. Create a savings account by putting a small amount of money aside every month. This way, you can pull from that account in emergencies and avoid applying for more credit.
4) Pay Your Bills Late
Paying your bills late is an expensive bad habit that will quickly ruin your credit. This includes payments to credit cards, loans, installments, phones, and utilities. Paying bills late will not only negatively affect your score, but most accounts also apply late fees.
Between the fees, the hit to your score, and the interest, you should avoid paying your bills late whenever you can. Many companies will raise your interest rate if you have multiple consecutive late payments. Check in to see if your account offers automatic payments so you won’t miss them.
Pro Tip: Payment history makes up 35% of your credit score. Write a list of all of your bills and their due dates. Create a budget and fill in your payments as they correspond to your paycheck. Following your budget will help you make your payments on time. Using a budget will also help you track and save your leftover money rather than spending it aimlessly.
5) Ignore Your Credit Report
Staying on top of your credit will allow you to catch any fraudulent activity or potential errors that can hurt your credit. If you are concerned that your score is low, remember that the sooner you start working on improving it, the faster it will increase.
There are several ways to check your credit for free, without hard inquiries ruining your credit. You can obtain Transunion and Equifax through Credit Karma and Experian on their website. You can also get all three credit reports for free at Annual Credit Report.
Pro Tip: Check your credit report at least once a year or quarterly. If you find something suspicious, make sure to dispute it immediately. It can take time to have items removed from your credit report, so you want to catch this behavior as soon as possible.
If you have recently run into any of these problems, reach out and speak with a professional. The more proactive you are with your credit, the faster you can fix any issues.
My Credit Improvement Coaching session will walk you through the step-by-step process to fix your credit score. From explaining what a credit report includes and how to read it to breaking down what lenders look for when analyzing your report, I will cover it all so you can continue to build good credit. I offer my expert opinion on which accounts are most crucial to settle and offer the support so you feel confident on your journey.