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The 5 Mistakes You're Making that Ruin Your Credit Rating

Jul 12, 2008
Protecting your credit rating isn't easy. Credit cards, auto loans, home equity loans and our suspect health insurance system can ruin your credit score. From easiest to hardest, here are the dangers you need to look out for:

1. Closing a credit card account:

Closing a credit card account lowers the amount of credit you have available, obviously. What's not as obvious is the effect this has on your credit rating, which can plummet as much as 100 points in only 2 months as a result of closing a credit account. Why? Because one of the most important factors in calculating credit score is your "percentage of credit available", and decreasing your available credit drops this score. Try to keep as much available credit as possible by using your card at least once a year on a small purchase to keep your account active. And remember, unless your card has an annual fee, do NOT cancel it!

2. Maxed out spending

Banks like to see credit cards with high limits and minimal balances. These "open" cards are a sign of a financially responsible borrower they're likely to get their money back from. A maxed-out card, on the other hand, creates doubt about whether the card holder can afford their purchases, and leads to lowered credit scores. Applying for new credit cards and requesting higher limits on existing cards can help to fix this problem.

3. Medical Collections:

Health insurance is not exactly known for its reliability - it's not uncommon for patients to receive a bill for something they think their health insurance covers, then discover their insurance company won't pay it. By then, the doctor's office has turned the debt over to collection, and your credit score has taken the damage. Protect yourself against this by checking every bill with both your doctor and insurance company to make sure it's paid. That extra bit of time you put in could save your credit score 50 points.

4. Co-signing:

We've all been asked to co-sign a loan by a friend or relative, and while this can be a great way to help someone close to you, it can also result in your credit being ruined. It's very important that you consider the following before co-signing -- YOU are responsible for whatever happens. That means if the person you co-signed for doesn't make the payments, you're expected to. If they file for bankruptcy and include your co-signed loan, the bankruptcy will show on your credit report (even though you haven't filed). Finally, even if you have PROOF that the other person is responsible (i.e. a divorce decree, a statement from that person, etc.) your credit will still be affected by anything they do (or don't do). My advice -- don't co-sign for anyone unless you can afford to make the payment yourself.

5. Late payments:

"Hey, my bills are getting paid. What's the harm if they're a little bit late?" Turns out, paying late can ruin an otherwise perfect credit score. Make sure your bills are paid on time by inquiring about and enrolling in your bank's automatic bill payment program. Your bank will automatically send your creditors a payment from your account every month, so you don't risk forgetting due dates, which can damage your credit rating and cost you hefty late fees.
About the Author
Author Jason Lancaster, a car business veteran, developed AccurateAutoAdvice.com. You'll find accurate tips for buying a car and car advice.
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