Finance Globe

U.S. financial and economic topics from several finance writers.
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How a Credit Score Gets Ruined

It takes years of good financial behavior to build a good credit score, but all your hard work can be ruined in just a few months. One or two slightly negative actions, like a maxed out balance or additional credit card inquiry, won’t affect your credit score too much. But, several negative actions in a short period of time can decimate your credit score.

Apply for a bunch of credit cards in a short time span. Your FICO score is based 10% on credit inquiries and 15% on the age of your credit history. Several inquiries into your credit score can drop your credit score. Likewise, opening several new accounts lowers your credit age, if you had a longer credit age to begin with. That’s another action that leads to a lower credit score.

Run up big balances that you can’t afford. It doesn’t matter whether the big balances come from a one-time spending spree or they accumulated over time. A big credit card balance hurts just the same. Multiple maxed out credit cards are devastating for your credit score since the amount of credit you’re using is 30% of your credit score. It’s the second biggest factor influencing your score.

Miss a few payments. After creating hefty balances on several credit cards, you’ll undoubtedly struggle to make the payments. Even the minimum can get unaffordable when your balances are several thousand dollars high. Once you get behind, it’s nearly impossible to catch up again. Before know it, your payments are several months past due. Because payment history is 35% of your credit score (the most important factor), missed payments will hurt your score tremendously.

It wont’ be long before the accounts are charged-off and probably sent to a collection agency – two additional actions that are brutal to your credit score.

Paying your credit cards while ignoring other bills – those that aren’t routinely reported to the credit bureaus – might delay credit score damage, but only for so long. Most businesses send their unpaid accounts to a collection agency, which will then add the account to your credit report. Your credit score will probably drop once a collection is added, even if you’re on time with all your other accounts.

File bankruptcy. Bankruptcy hurts your credit score more than any single negative action. But, your credit score may not have much further to fall after it’s been hit by numerous other negatives, like the ones mentioned before. The worse thing about bankruptcy, is that it follows you longer than most other negative information, continually reminding creditors and lenders of your biggest financial mistake.

Your credit score is basically a reflection of how responsibly you handle your credit obligations. Being irresponsible is the quickest way to ruin your credit score. Make wise, well-researched decisions when it comes to finances and especially credit.

The best way to avoid a ruined credit score is to avoid the actions listed in this article. Most importantly, don’t take on more credit than you can afford to pay back. Don’t overestimate what you can afford to pay back.
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Tuesday, 20 August 2019

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