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Only
three years ago it was a totally different world, even your dog could
get a credit card. Fast forward three years and things have changed
a lot, basically you can’t get credit unless you really don’t
need it. Banks would rather spend our bailout money buying other banks
than trying to unfreeze the iced over credit markets. What this means
for the average consumer is that any little blemish can send you down
the slippery slope of declining credit scores and it can happen more
easily than ever. Here’s how you can avoid such an icy credit
score doom.
Don’t Close Credit Accounts
Oddly, cutting lines of credit actually is harmful to a consumer’s
credit report. This may be counterintuitive since not needing lines
of credit would seem to indicate that a consumer is in good economic
health and therefore doesn’t need the credit. In reality what
this does is change your ration of used to unused credit, something
that is given high importance when calculating credit ratings. If a
consumer wants to get rid of some cards with high interest rates or
annual fees and also wants to keep the same credit score they will have
to reduce their outstanding balances to do so. Another good reason to
keep old accounts open is that accounts with long history’s are
very beneficial when credit scores are calculated.
Don’t Ignore Your Credit Cards
Even though you generally don’t want to simply close unused cards,
you can’t just ignore them either. Creditors hate having unused
lines of open available credit (especially right now) and will cancel
the credit lines themselves due to inactivity. So ideally your credit
cards should all be used periodically to prevent credit accounts from
closing, with the same resulting problems as mentioned above.
Don’t Use too Much of Credit
What’s worse than not using your credit? Using too much of your
credit. To have a good FICO score consumers need to have a lot of available
credit that is not utilized too little or too much. Also, when scores
are calculated it is better to have several cards with low balances
than to have one card with a large balance. Also, running up a high
balance then paying it off every month will still be considered the
same as having a large balance every month. FICO score calculations
do not take it into account if the balance is continually paid off and
then run back up. The worse thing to do is to have credit lines continually
maxed out, even if you are near your maximum because the creditors cut
your limits back!
Don’t Repetedly Apply for New Credit
First of all, new credit cards lower the average length of time that
you have had each of your lines of credit. When FICO scores are calculated
they simply add the length of time you have had each card and then divide
it by the number of cards you have. So if you get four new cards for
one shopping season then that’s four cards with no history what
so ever that will bring your average length of time that you have held
cards crashing down.
Also, applying for credit casuses a “hard inquiry” on your
credit report (as opposed to a soft inquiry like running a credit report).
Although these inquirys aren’t particularly damaging to a credit
score in isolation they can be very damaging if you have a lot of them
in a short period of time.
The exception to this is when you are shopping for a loan or mortgages,
FICO score calculations allow for a 45 day window so that consumers
can compare offers.
Don’t Ignore Fines or Other Bills
Everything from parking tickets to overdue utility bills can have a
negative impact on your credit score. Any business or municipality that
feels you owe them money can report you even if they don’t normally
report your good payments. So keep yourself out of collections!
Don’t Ignore Mistakes on Your Credit Report
The three credit bureaus do make mistakes but more often companies erroneously
send the wrong name to collections. The good news is that it is easy
to dispute inaccuracies on your credit report. Your first step is to
get a free annual credit report and to check
it over. Mistakes can usually be removed quickly and easily, so it’s
important to have credit monitoring available.
Don’t Miss Payments
Obviously making late or skipping payments will have an adverse effect
on your score. However all missed/late payments are not equal, older
mistakes have less of an effect than newer mistakes. In fact, once a
mistake is several years old it may not affect your FICO score at all.
Also how late the payment was made when it finally was is factored in.
Having recent and still unpaid debt is the worst, credit scores are
calculated in order to determine the risk of lending to a particular
person in the future and if they are currently not paying their bills
that is a bad sign for what’s to come.
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