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How to Massacre Your Credit Score

Jan 13, 2008
Many consumers know that they have a credit score but they may not know what the score is. As well, many consumers know that there are some actions or inactions that they can take that will help or hurt their score. Again, they know the broad picture, but not the details. Here are some of the things that consumers do that all but massacres their credit score.

First of all, consumers should understand that lenders and creditors are constantly updating the information that is on a person's credit report. This is one of the most important reasons why consumers must keep an eye out for mistakes or omissions on their reports. Credit reports are not static.

Some actions or inactions that can kill a credit score follow:

Not examining credit reports often enough is one of the most common problems that consumers face. These reports are used to determine your credit score. If there are mistakes, you need to get them corrected. The truth is one in four credit reports contain errors that are serious enough to hurt a consumer's chances of getting loan.

FICO credit scores are calculated from five categories listed on credit reports: your payment history, amount of money owed, length of credit history, new credit obtained, and types of credit used.

The second thing many consumers do to hurt themselves is to pay late. Late payments are recorded on your report and they usually stay there for seven years. In general, payment history accounts for 35 percent of the credit score.

The third thing that can cause problems is simply having too many credit inquiries. A credit inquiry occurs whenever someone wants to look at your credit file.

Rate shopping for a car loan, a home mortgage, or a credit card can damage your credit if it is not done properly. Lenders you approach ask credit bureaus for a copy of your report for review. This request shows up on the credit report as a hard inquiry, which affects your credit score.

Minimize the potential damage by rate shopping within a short period of time, such as a couple of weeks. According to myfico.com, "Multiple inquiries from auto or mortgage lenders in a short period of time are typically seen as one inquiry and have little impact on your score."

Believe it or not, closing your old accounts can damage your score because, in essence, doing so may shorten your credit history. Credit history makes up about 15 percent of the score, so you do not want to shorten it unless it is absolutely necessary.

Closing accounts will also affect what is called the credit utilization ratio. This is the amount of credit you are using relative to the amount of available credit you have. Closing an account will cause your ratio to go up because closing the account drops your total available credit while not reducing the amount of credit you are using.

Consumers should be very aware of the amount of debt that they have on the books. Amounts owed will make up nearly 30 percent of the score. The more you owe, the lower your score will be.

Lastly, consumers should be careful about cosigning for another person. If the other person does not pay on time you will most likely see a reduction in your credit score.

Keep track of what is on your credit reports and you will have done a lot to maximize your credit score.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Mortgage and Mortgages
Visit Building Societies come out top in best mortgage table
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