23 Blunders That Can Tank Your Credit Score
Do you know your credit score? Even small mistakes like missed payments and high credit card balances can severely damage it. Stay vigilant and safeguard your credit profile by understanding the most critical errors that can ruin your rating.
Missing Payments
Missing even a single payment on your credit card or loan can have a severe impact on your credit score. Payment history makes up 35% of your credit score, making it the most significant factor. Always set reminders or automate payments to avoid this common pitfall.
Maxing Out Credit Cards
Using up your entire credit limit can damage your credit rating. High credit utilization, which is the ratio of your credit card balances to your credit limits, negatively affects your score. Aim to keep your utilization below 30% to maintain a healthy credit score.
Closing Old Credit Accounts
Closing old credit accounts might seem like a good idea, but it can actually hurt your credit score. The length of your credit history accounts for 15% of your score, and older accounts positively impact this. Keep your oldest accounts open to benefit from their long history.
Applying for Too Much Credit
Each time you apply for a new credit card or loan, a hard inquiry is recorded on your credit report. Multiple inquiries in a short period can signal financial instability to lenders. Limit your applications to avoid lowering your score unnecessarily.
Not Checking Your Credit Report
Errors on your credit report can go unnoticed and harm your credit rating. Regularly checking your credit report allows you to catch and dispute inaccuracies. Federal law entitles you to one free credit report annually from each of the three major credit bureaus.
Ignoring Medical Bills
Unpaid medical bills can be sent to collections, significantly damaging your credit score. Even small bills can have a big impact if left unpaid. Always address medical bills promptly and consider negotiating payment plans if necessary.
Having Only One Type of Credit
A mix of credit types, such as credit cards, installment loans, and mortgages, positively impacts your credit score. Relying on just one type of credit can limit your score’s growth potential. Diversify your credit portfolio to show lenders you can manage various credit types.
Paying Less Than the Minimum
Consistently paying less than the minimum required payment on your credit cards can lead to penalties and interest rate hikes. This behavior signals to lenders that you may be struggling to manage your debt. Always strive to pay at least the minimum amount due.
Settling for High-Interest Debt
Carrying high-interest debt can quickly spiral out of control, making it harder to pay off your balances. This can lead to missed payments and higher credit utilization. Look for balance transfer offers or lower interest rate loans to manage your debt more effectively.
Co-Signing for Others
When you co-sign for someone else’s loan, you’re equally responsible for the debt. If they miss payments, it negatively affects your credit score. Be cautious about co-signing unless you’re confident the primary borrower will manage the payments responsibly.
Ignoring Credit Utilization
Credit utilization, the percentage of your available credit that you’re using, is a crucial factor in your credit score. High utilization indicates risk to lenders and can lower your score. Keep your utilization ratio low by paying off balances and avoiding maxing out cards.
Defaulting on Loans
Defaulting on a loan has severe consequences for your credit score. It indicates to lenders that you are a high-risk borrower. Always communicate with your lender if you’re having trouble making payments to explore alternative solutions.
Not Having an Emergency Fund
Lack of an emergency fund can force you to rely on credit in unexpected situations. This can lead to high balances and missed payments if you’re unable to pay off the debt quickly. Aim to save at least three to six months’ worth of expenses to avoid relying on credit in emergencies.
Skipping Rent Payments
While rent payments themselves don’t directly affect your credit score, unpaid rent that goes to collections will. This can severely impact your credit rating. Always prioritize rent payments and communicate with your landlord if you’re facing financial difficulties.
Ignoring Collection Notices
Ignoring collection notices won’t make them go away; it will only worsen your credit score. Collections stay on your credit report for up to seven years. Address collection notices promptly by negotiating payment or settlement terms with the collector.
Using Cash Advances
Cash advances from credit cards often come with high fees and interest rates. They can quickly lead to unmanageable debt and negatively impact your credit score. Avoid cash advances unless absolutely necessary, and explore other borrowing options first.
Filing for Bankruptcy
Bankruptcy can severely damage your credit score for up to ten years. It’s a last resort that should only be considered when all other options have been exhausted. Explore alternatives such as debt consolidation or credit counseling before filing for bankruptcy.
Ignoring Interest Rates
High interest rates can quickly increase the amount you owe, making it harder to pay down your debt. This can lead to higher credit utilization and missed payments. Always compare interest rates before taking on new debt and aim to pay off high-interest balances first.
Not Using Credit at All
Having no credit history can be as detrimental as having bad credit. Lenders need to see a track record of how you manage credit to assess your risk. Use a credit card responsibly and pay it off in full each month to build a positive credit history.
Overextending Yourself Financially
Taking on more debt than you can handle can lead to missed payments and high credit utilization. Be realistic about what you can afford and avoid overextending yourself. Create a budget and stick to it to manage your finances effectively.
Letting Accounts Go to Collections
Allowing accounts to go to collections has a major negative impact on your credit score. Collection accounts indicate serious financial mismanagement to lenders. Always attempt to settle debts before they reach the collection stage to protect your credit rating.
Josh Dudick
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.