Your credit score doesn’t need to take a backseat as the busy holiday season approaches. Instead, as the year winds down, start thinking about ways you can improve your creditworthiness in 2014.
When you apply for credit, lenders evaluate your credit score and the information in your credit report to assess your risk as a borrower. With a higher credit score, lenders will view you as less of a risk and will be more likely to extend you credit, and they will also likely offer you the best terms and interest rates.
Before you can positively impact your credit score, you need to understand which credit behaviors will have a negative impact on it.
While credit scoring models have different ways to evaluate the information in your credit report, there are five possible ways you can damage your credit score across the board:
1. Making late payments.
In general, your payment history has the strongest impact on your credit score. About 35 percent of your Equifax credit score, for example, is based on your payment history. That means that any late payments—whether on credit cards, an auto loan, your mortgage, or another credit account—could cause your credit score to take a dive.
Your late payment history will stick around on your credit report, too. For example, one delinquent payment that is 30 days late can remain on your credit report for up to seven years.
Tip: Paying your bills in full and on time should reflect positively on your credit score. To avoid a late-payment blemish on your credit report, consider using automatic payments or setting up electronic payment reminders on your phone or computer.
2. Racking up high balances.
Your credit score also takes into account your credit utilization (how much of your available credit you are using). A high debt-to-credit ratio—meaning that you are borrowing a significant portion of your available credit—will generally have a negative impact on your credit score.
Tip: Work on keeping your ratio of debt to available credit as low as possible to help boost your credit score. Avoid carrying a balance of more than 30 percent of your credit limit, since lenders may view you less favorably if you take on any more debt. If you are carrying debt, work on paying it off as quickly as possible. Paying off your current debt may open up some of your available credit.
3. Applying for a lot of credit at once.
If a creditor or lender accesses your credit report because of a transaction you initiated, it will trigger a hard inquiry on your credit report. If you apply for too much credit over a short period of time, triggering many hard inquires, your credit score could drop and lenders may view you as higher risk.
A single hard inquiry will usually not have a significant impact on your credit score, and credit scoring models generally don’t penalize consumers for shopping for the best rate on student loans, auto loans, and mortgages within a short timeframe.
Tip: Because credit scoring models consider your recent credit activity to evaluate your need for credit, only apply for credit when you really need it to avoid overextending yourself.
4. Closing an account.
Closing one of your credit accounts could reflect negatively on your credit score because it will change your credit utilization. If you close an account, you may lower the combined credit limit on all of your accounts, making your debt-to-credit ratio appear higher.
Tip: While positive credit behavior—such as paying your bills on time—will reflect positively on your credit score, you don’t need to carry a balance on all of your accounts. Instead of closing an account, consider paying off a small purchase on the account every few months, which will generally get reported to the credit reporting agencies.
5. Having a short credit history.
About 5 percent to 7 percent of your Equifax credit score is based on the length of your credit history, and the score considers both the age of your oldest account and the most recent account opened.
If you do not have at least one credit account open for at least six months or if you do not have at least one update to at least one credit account in the last six months, you may not have a credit history or credit score. Without a credit history, it is difficult for creditors to determine your creditworthiness when making decisions about extending you credit.
Tip: If you plan to borrow money in the future, start thinking about establishing your credit history now. If you don’t have a credit history or you have a thin file, consider opening a retail, gas, or low-interest credit card in order to start building a positive credit history.
As you work on boosting your credit score, make sure to regularly monitor your credit report so you know where you stand. If you spot any errors on your credit report, file a dispute with the necessary credit reporting agency to have the erroneous information corrected as soon as possible.
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