As an adult, the first lesson you'll learn about finances, is that your credit score is of paramount importance when you're looking for mortgages and similar lifetime investments. Very often, without meaning to, you tend to take steps that harm your credit. It's important therefore, to know these traps, just as it's important to maintain financial discipline.
Here are 10 such things that will influence your credit score negatively. Be informed and forewarned.
1. Maxed Out Credit Cards
When you max out your cards, it will show on your credit report as using 100% of your credit balance – which is counter-productive for you. Just so you will have an idea – the best credit to limit ratio should be 35% - 65% at most. If it crosses this threshold, it will damage your score.
2. Defaulting On Payments
The fact that you have not paid a loan installment shows that you are not responsible enough to uphold your side of the contract, which you signed at the time of the loan application. This is one of the easiest ways to hurt your credit score.
When your home is in foreclosure, it actually says that your credit provider can no longer trust you with the loan, so they cancelled it and made good on the losses. This is a terrible thing for your credit score, which will show you as incapable of proper financial planning. This also has a vicious cycle effect, as following such a development it will be very difficult for you – if possible at all – to avail of a home mortgage.
4. Account Collection
You credit score hurts when a creditor sends your account for third-party collection. This is because (as far as your credit report is concerned) this is interpreted as the "last resort" available to your creditor. Normally, when all else fails the creditor company would hand over your account to a third party, and hire them to collect the amount due. In other words, this means you need to pay your debts or negotiate terms with your creditor, while they are still willing to listen. Do not let it slip through your fingers and reach a debt collection agency!
This is devastating, to say the least, to your credit score. You will bear the “branding” for at least 10 long years. You'll definitely not want to be considered a “high risk” investment by various creditors. Avoid bankruptcy like plague; only accept it when the all other options have failed.
6. Charge off Account
One of the worst things that can happen to your credit report and score is to have an account charged off. This implies that the creditors have determined that you are unable to pay your debt. This shows you as a financially-irresponsible adult – almost on a par with a person who declares bankruptcy.
7. Paying Credit Cards Late
It's bad enough that you're using your credit cards when you do not have enough money to pay the bills; it's even worse when you pay late (and usually the minimum required payment). For one, your credit score will reach a new low; and secondly, you'll slip into unmanageable credit card debt in no time at all!