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The 5 Ways You're Ruining Your Credit Rating

Jul 16, 2008
It's tough to keep a good credit rating, and even the best of us can accidentally damage our score. There are a myriad of credit risks everywhere, from credit cards, home equity and auto loans, to a dubious health insurance system, and it's easy to make a mistake somewhere along the line. These are the top 5 mistakes, from easiest to hardest, that you might be making to damage your credit score:

1. Closing your account:

Many people close credit card accounts as soon as they pay them off, making this the easiest and most common way that credit ratings are damaged. In fact, I've seen credit scores drop one-hundred points in as little as two months because a misguided consumer closed a couple of credit card accounts. Closing an account hurts your rating because it decreases your "percentage of credit available." Credit scores are based on many factors, but this percentage is one of the most important. The more available (or open) credit you have, the higher your credit score will be. Unless your credit card has an annual fee, NEVER cancel it. In fact, make sure you use it at least once a year to maintain your account -- just don't buy anything that you can't pay off as soon as the bill comes.

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 Debt Collections

We've all had this happen: your doctor's office sends you the bill for something your health insurance is supposed to cover. Next thing you know, wires get crossed, the insurance company doesn't pay the bill, and the doctor's office turns the debt over to collection. Believe it or not, this happens all the time. To make sure it doesn't happen to you, pay attention to every bill you get and follow-up with both your insurer and your doctor to make sure the bill is paid. It's a little extra work on your part, but it's well worth it -- one single medical collection can drop your score 50 points.

4. Co-signing a loan

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. Overdue Payments

Can't remember to pay your bills? It could be the only thing keeping you from perfect credit! There are tons of people out there who do everything else right, but have poor credit simply because they pay their bills late. To make sure your bills are paid on time, every time, visit your bank and ask about an automatic bill payment program. Once you enrol in this, your bank will automatically send a payment to your creditor each month from your account. This will improve your credit by making sure you're never late with a payment again, and can save you money by preventing late fees!
About the Author
Author Jason Lancaster, a car industry veteran, developed AccurateAutoAdvice.com. You'll find accurate tips for buying a car and auto advice.
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