Top 4 Ways to Ruin Your FICO® Credit Score

your FICO credit scoreYour credit score is one of the most important pieces of information financial institutions use to determine everything from the interest rate you’ll pay to the type of loan you qualify for.  There are many things that can negatively affect your Credit Score and your ability to effectively manage it may well save you thousands of dollars over your lifetime. 

Here are four common mistakes that can negatively affect your credit score and what you can do to avoid them:

1. Not Managing Your Credit Utilization Ratio

Credit Utilization Ratio is simply the ratio of outstanding debt to available credit and accounts for almost 30% of your credit score.  Using up too much of your available credit will impact your credit utilization ratio and lower your credit score.  Individuals with credit scores over 760, on average have credit utilization ratios of around 7 percent so a good goal is to use no more than 10% of your available credit at any given time.

Closing an account or taking on debt too quickly can also impact your credit utilization ratio and ultimately lower your credit score so you’ll want to keep those accounts open, especially older accounts, and not take on debt to quickly.  

2. Don’t Make Payments on Time

Being 30 days late on a single payment when you have a long history of on-time payments won’t hurt much however, it can have a big impact when you have a limited credit history.  Miss making a payment by 90 days or more and it is considered a major delinquency and will remain on your credit report for 7 years after you pay off the debt.

3. Open Too Many New Accounts

Opening multiple credit card accounts is never a good idea and can hurt your credit score in a number of ways. First, every time you apply for credit, an inquiry appears on your credit report and multiple inquiries have an even greater impact.  In addition, the average age of your accounts is taken into account when calculating your credit score and having too many new accounts with no credit history can lower your score.  Instead, aim for no more than 2 credit cards initially and avoid carrying large balances.

4. Co-Sign a Loan

Another thing that can hurt your credit score is to co-sign a loan for someone.  There is a reason the bank is requiring a co-signer, the borrower has been deemed a poor credit risk which means the bank believes there is a chance the borrower will be unable to make loan payments in the future.  This should be a red flag for anyone being asked to co-sign a loan.  By co-signing a loan you are agreeing to pay off the debt should the borrower miss a payment or otherwise not fulfill their loan obligations.  In addition, the outstanding loan will appear on your credit report and may impact any future credit decisions for you.

The goal is to use your credit cards in a way that demonstrates you can comfortably and responsibly manage your debt.  In other words, you should use your credit cards but make sure you are able to pay off the balance in no more than 1-2 months.  If you do that you can expect to see your credit score rise and you will pay less in interest.

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