5 Ways You May be Accidentally Wrecking Your Credit
By Barbara Pronin
It’s tough enough to make financial decisions that keep you in the black and prepare you for retirement. But it’s something else to sabotage your credit without realizing you are doing so. Finance experts at Credit.com suggest five ways you may accidentally be wrecking your own credit:
Not paying attention to balances – About 30 percent of your credit score is based on the amount of your debt, which includes the ratio of how much you owe on your credit lines divided by your total credit limit. If you have total credit lines of $40,000, and you have a total outstanding balance of $10,000, your credit utilization ratio is 25 percent ($10,000 divided by $40,000). If the ratio exceeds 30 percent, it can have a negative impact on your credit score.
Closing accounts - Some people make it a habit to close paid-off credit cards. From a credit perspective, this can have a negative impact. A paid-off credit card is a positive contributor to your credit score even if you no longer use it because the available credit you have contributes to your credit utilization ratio. Closing the card lowers your available credit, increasing your credit utilization and potentially lowering your score.
Co-signing loans – This is an area where people are often too casual. They assume they are simply doing a good deed to help a friend or relative. But when you co-sign a loan, you are involved in that loan and it will be on your credit report until it is paid. If the primary borrower makes a late payment, this will impact your credit score. Should the loan go into default, this will also show up on your credit.
Applying for too many lines of credit – If you have good credit, it's likely you are bombarded with credit offers. If you keep applying for the better ones, you could be hurting your credit because credit inquiries account for 10 percent of your overall score – so don’t apply for more lines of credit than you need.
Not monitoring your credit score - Scores can change on at least a monthly basis, but you won't know about a drop in your score unless you are paying attention. Also errors are possible, and the best defense is to regularly monitor your scores.