Whether a consumer has an abysmal credit score or a fantastic one, the reduction of overall credit availability over the past few years has raised the standards across the board for credit score requirements. What was once considered a great score now doesn’t seem too great as lenders are requiring even stronger credit histories and in most cases a greater minimum score up about 20-40 points. Not only have minimum scores risen but also the method in which the Equifax, TransUnion, and Experian formulate their FICO scores has changed and continues to change.
There are five ways consumers consistently kill their scores, a few of them most people are unaware are making such a significant impact on their scores.
1. Late Payments
Missing a payment or sending a payment in late is the most common mistake consumers make and it’s a big one. Typically a single 30-day late payment will drop a credit score anywhere from 60 to 110 points! As late fees and following payment cycles hit, consumers typically fall farther and farther behind accumulating even more damaging 60 or 90-day lates. If a late payment has already made its mark on your credit score, unfortunately this negative reporting will appear for the next 7 years. Though the mistake can’t be undone, luckily as time passes the impact on your score decreases incrementally over time until there is little to no affect on your score years later.
2. Opening New Credit Accounts
When opening a new account, whether it is a new credit card or purchasing a new car, expect at least a 5-point deduction from your credit score simply for the credit history request. From there opening a new account draws suspicion on your overall ability to repay by extending the amount you are essentially borrowing and promising to pay back. A new account on your credit report typically will drop your credit score up to 15-points initially.
3. Closing Credit Accounts
Though it seems counterintuitive a credit score will drop when a credit account is closed, even if it as at the borrowers own request. A credit score is calculated in part by comparing available credit to outstanding balances all in one lump sum number. By closing an account essentially you are slicing off a portion of available credit. In most cases if an account is already in place it is worth considering paying annual fees and maintaining a low balance of just a few dollars. This will actually end up helping your score in the long run as your credit history deepens.
4. Running High Balances
Again the calculation between available credits against outstanding balances comes into play and is the second most common way that consumers hack away at their credit scores. The best way to handle this situation is to pay off each credit card balance across the board each month. Many borrowers believe that paying off one card at a time is the best way to restore a credit rating, but in most cases by lowering the outstanding balances on all of the credit cards collectively, a credit score will recover more quickly.
5. Defaulting on Credit
More people than ever are facing the reality of defaulting on credit commitments and in turn credit scores are dropping to exceptional lows. Judgments, liens, foreclosures, short sales and bankruptcies will remain on a consumers credit report for 7 to 10 years and can drop a credit score around 200 points. Defaulting is of course always to be avoided but if it is the reality being faced credit can always be restored. A credit history is an overall picture of your ability to manage debt, anyone can always turn things around and build a positive credit rating back in about 2 years.