Finding out the exact formula for improving your credit score has always been a little like pulling teeth. Most of us understand that the big culprits, i.e., bankruptcy, foreclosures, and repossessions, will have a tremendous negative effect on our credit score. However, there are a few day-to-day dangers that can eventually make the difference between someone getting that lower interest rate or paying thousands of dollars more over the life of a loan.
MAXING OUT A CREDIT CARD
Using 100% of your limit on any credit card puts you at risk of over-limit fees. It also takes a bite out of your credit score. A person with a 680 score might lose 10 to 30 points from this one action, while a 780 scorer could shed 25 to 45 points. The higher your credit score, the more points you tend to lose from “bad” actions. The scoring formula is very sensitive to any sign you’re getting in over your head. As a rule of thumb, one should never let any balance on a credit card exceed 30% of the total limit. This action alone will keep your credit score safe.
SKIPPING A PAYMENT
Mailing a payment a few days late normally won’t affect your credit score. The big hurt comes when you miss a payment cycle completely. A 30-day-late report would shave 60 to 80 points from our 680 scorer, and 90 to 110 points off from our 780 scorer. In other words, one lapse of attention could plunge the 680 scorer into sub-prime territory, and our 780 scorer could find credit much harder to get and more expensive in the long run. It is important to set up automatic payments to ensure your bills get paid on time, all the time.
SETTLING A CREDIT CARD DEBT
All the advertisements about “settling your debt for pennies on the dollar” make debt settlement sound like a great solution. But failing to pay what you owe a creditor will take a serious toll on your credit score. The 680 scorer would lose between 45 to 65 points with this maneuver, while the 780 scorer would shed 105 to 125 points. Also, you should be aware that the amount of debt your creditor “forgives” in debt settlement is typically added to your taxable income. So you may save money by settling debt, but you’ll give some back to Uncle Sam in higher taxes.
CLOSING CREDIT CARD ACCOUNTS
In theory, it may seem like a financially sound decision to close out old or excess credit card accounts. However, every time a credit card account is closed your credit score takes a slight ding. The reason being, your credit score is based on the ratio of your total actual debt to your total available credit. Every time you close an account, you have just decreased your total available credit—thus closing the ratio gap between actual debt and available credit. For example, let’s say you have $1,000 in credit card debt. You have 3 credit card accounts with $3,000 limits on each for a total of $9,000 in available credit. If you were to close one of those accounts, your total available credit is now $6,000. With the same $1,000 in credit card debt, you have just decreased your actual debt to available credit ratio by 66%.
Jordan Crouter
cell: 949-310-6998
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