Trans World Assurance Blog

Big Credit Mistakes to Avoid (Money Book, Jeff Burch)

Posted on Fri, Mar 25, 2011

 

  • Canceling old credit cards: If 15% of your credit score depends on length of credit history, it’s deemed a big mistake to cancel old credit cards. In addition, canceling an old credit card can worsen your debt ratio (makes up 30% of your score), if you have balances on other cards. Finally, if you don’t have credit cards older than seven years, do not cancel your oldest credit card.
  • Late on payments: Since 35% of your score depends on payment history and only payments over thirty days late affect your score, it is critical to pay on time. One late credit card payment can drop your credit score by 20 points, missing a car payment can down your credit score by nearly 100 points and if auto payment is late by 90 days or more it can plunge another 25 points. Therefore, if you’re going to be late on any loan, contact your lender ASAP and work out a deal, most are very understanding. If that doesn’t work, borrow from your savings, family or friends to keep current or juggle payments a bit, but make sure you’re not too late on any one loan.
  • Having too many open lines of credit: 10% of your score comes from the types of credit used. If you have a lot of revolving credit, creditors see you as a risk, as you have the potential to rack up a lot of debt quickly. Make it a policy not to open any store credit cards, and if you have some already cancel them once they’re paid off.
  • Maxing out cards: 30% of your credit score depends on the ratio of credit card debt and limits. Therefore, maxing out cards will cause your credit score to drop, even if you keep up with the payments. Instead of charging more, focus on paying down cards.
  • Avoiding credit cards: If you are avoiding credit cards, you should still consider getting one to start or improve credit history. Purchase gas with the card and pay it off in full each month. Having a solid credit score will be useful later when you are ready to purchase a home, car, etc., at lower interest rates.
  • Requesting credit limit reduction: Never reduce your credit limit on cards, because it will affect your debt ratio and lower your credit score. Only set a limit reduction if it has a huge psychological value for you.
  • Not researching a credit counseling service: If you intend to use a credit counseling service, find legitimate credit counseling services listed in the Yellow pages, Google, etc. and follow up with the Better Business Bureau for any complaints. Remember, your credit score will affect many of your financial moves for years, so do not skimp on research.
  • Declaring bankruptcy: With new bankruptcy laws now in effect, people who would have gone forward with bankruptcy before the law now must go through credit counseling before filing bankruptcy. Bankruptcy can decimate your credit score for 10 years. Quite often, there are better solutions, such as negotiating with creditors and so forth.
  • Playing credit card roulette: Rolling credit debt to other credit cards can seriously damage your credit score, if you are not an expert. If you make an error, your credit score could easily be blown up.
  • Never checking credit report: Since 25% of credit reports contain errors (that are serious enough to deny credit), and identity theft is common today, therefore, it would be wise to get your free credit report from www.annualcreditreport.com at least once a year, and correct any mistakes on the report.

 

This is the final article in a series of articles on Credit Scores from the Money Book by Jeff Burch. To download a pdf of the entire series, click on the link below.

Download Credit Article

Tags: Trans World Assurance, credit history, Money Book, Jeff Burch, establish credit, military