1. Settling with creditor on past due accounts
If your account is significantly past due or has gone into collections, sometimes creditors will offer you a deal known as “settling” where you can pay less than the full amount you owe. For example, if you owe $5000 on a past due credit card account, the credit card company may make you a deal where you can pay $3500 instead of $5000 to get rid of your debt. While this may seem like a good deal, it’s not—it will adversely affect your credit score since the creditor will report the deficiency balance (the difference between the full amount you originally owed and the “settled” amount you agreed to pay) on your credit report.
2. Having a high credit utilization ratio/maxing out your credit cards
Fifteen percent of your credit score is based on your credit utilization ratio, which is also known as a debt-to-credit ratio. For example, if you have a $2000 limit on your credit card and have $1000 of debt on that card, your credit utilization ratio is 50 percent ($1000/$2000 = 0.5 = 50 percent). Typically, any credit utilization ratio over 40 percent will cause your credit score to drop. Having maxed-out credit cards means your credit utilization ratio is 100 percent, which can really send your credit score plummeting. Experts say that it’s ideal to keep your credit utilization ratio below 10 percent.
3. Closing your older accounts
Another 15 percent of your credit score is based on the length of your credit history. Let’s say you have four credit card accounts: two of the accounts have been open for 10 years, and the other two are newer accounts that have been opened in the last year or two. If you close your older accounts, your credit score may drop. As such, even if you rarely or never use your older accounts, it can be beneficial to your credit score to keep those accounts open.
4. Applying for too many credit cards and loans
It can be tempting to open lots of new credit card accounts, especially when certain credit cards offer enticing sign-up incentives such as “20% off your first purchase with a new credit card account.” Every time you apply for a new credit card or fill out a loan application, an official inquiry is made on your credit report. Too many of these inquiries in a short amount of time makes lenders believe that you are about to go on a spending spree and will cause your credit score to drop.
5. Not paying parking tickets or library fines
Municipal governments in some jurisdictions will turn over outstanding fines for things such as unpaid parking tickets and library overdue fines to collection agencies. Having your account sent to collections will cause your credit score to drop.
6. Failing to check your own credit report for errors
Whether due to clerical mistakes or identify-theft issues, your credit report may contain errors and inaccuracies. These mistakes can wreak havoc on your financial health and cost you tons of money down the road, so it’s essential that you are proactive about regularly checking your own credit report. Pursuant to the federal Fair Credit Reporting Act, consumers are entitled to one free credit report per year. You can obtain this free credit report at www.annualcreditreport.com.
7. Paying your credit card bills late
Thirty-five percent of your credit score is based on your payment history; as such, paying your credit card bills late can have an adverse effect on your credit score. If you are more than 30 days late on a payment, the credit card company will notify the credit bureau and an entry will be added to your credit report, which will last for seven years. A 90-day late payment entry is much worse for your credit score than a 30-day or 60-day late payment entry.
8. Paying your rent late
If you are more than 30 days late paying your rent to your landlord, she can report your delinquency to the credit bureau, which will hurt your credit score.
9. Not paying at all
Not paying your past due bills at all is much more detrimental to your credit score than simply paying these bills late. If a creditor doesn’t think they will receive payments from you, they may write the account off as a loss and issue a charge-off. If you are more than 180 days late (you missed six monthly payments), the credit card company will typically charge-off your account. A charge-off will stay on your credit report for seven years.
10. Defaulting on a loan
If you fail to make payments on your loan, the loan becomes delinquent and will have a negative effect on your credit score. After a specified period of time (the exact time period depends on the type of loan you have), your delinquent loan will default, and your credit score will drop even further.