Most people think a negative credit score is the result of missed payments on loans or credit cards, but that is only a small part of the equation.
In fact, there are a number of lesser known factors that come into play that most borrowers don't realize until it's too late.
See if any of these sound familiar: 1.
We've got too many credit cards, let's close some of these accounts.
Mistake - big mistake.
30 percent of your credit score is calculated based on the amount of debt owing against the total credit limit.
If you lower the amount of credit by closing accounts, then the ratio of debt to available credit can appear worse than it actually is.
If you have dormant credit cards that require annual fees, then it makes sense to close those, but do so gradually, not all at once.
Also select newer accounts over old ones that have built up a credit history.
Good customers have longer credit history and closing those old cards is like deleting your financial past.
2.
I've got credit cards, but I never use them.
This isn't quite as bad as closing your accounts, but it can have negative consequences.
In some cases, a creditor will decide to close the account due to lack of use, and in turn removing any history of use from your credit report.
In a similar scenario, a creditor may not close your account, but may stop reporting it to the credit bureaus, which will have the same affect.
3.
It's OK to have a large balance, as long as I pay it off.
Sounds simple, doesn't it? I mean why do they bother giving you that juicy credit limit? Unfortunately, racking up your card sends off alarms with FICO scores.
Customers who run high balances, even if paid off every month, negatively effect the whole debt to ratio scenario discussed above.
It appears on paper as though you've maxed out your cards instead of keeping them at a manageable limit.
4.
So and so is offering a better interest rate, let's apply for their card too.
Keep in mind that your length of credit history accounts for 15 percent of your credit score.
If you've had one credit card for ten years, that gives you ten years of history, which is a good thing.
However, if you have four cards under two years old, and one at ten years old, all of those time frames would be averaged together, decreasing down your overall score.
In addition, every time you apply for credit it results in a hard inquiry against your credit report.
Many of these inquiries in a short span of time looks suspicious, and may suggest illegal activity.
These inquiries don't count against you in cases of auto loans or mortgages where a borrower may be doing some legitimate shopping around for the best rate.
5.
What does an overdue library book have to do with my credit? These days credit can be used to pay for pretty much everything from library dues to dog licenses or municipal water bills.
If you pay faithfully every month, no one finds out about it, but the minute a collection agency reports the payment as past due, it shows up as a black mark on your credit report.
6.
There is a mistake on my credit report, but it's too much of a hassle to fix it.
It's worth requesting a credit report every now and again to ensure the report is indeed correct and you aren't being penalized for something in error.
7.
I can't afford to make a payment this month, but I'll send double next month.
Missed or late payments are the easiest way to trash a credit score.
Just as your mother probably told you, make sure you make at least the minimum payment and ensure it arrives before the due date.
Apparently, according to FICO scores, not all overdue or missed payments are treated equally.
A past blemish from two years ago where you were 90 days late is not as bad as a recent late payment of only 30 days.
The recent indiscretion may be an indicator of a future pattern of lateness.
Lenders are not so much concerned with the actual credit score numbers as to the problems they may be pointing to.
If you were to divide credit score indicators up as pieces of a pie, this is how they would look: Payment History: 35% Amounts Owed: 30% Length of Credit History: 15% New Credit: 10% Types of Credit Used: 10%
In fact, there are a number of lesser known factors that come into play that most borrowers don't realize until it's too late.
See if any of these sound familiar: 1.
We've got too many credit cards, let's close some of these accounts.
Mistake - big mistake.
30 percent of your credit score is calculated based on the amount of debt owing against the total credit limit.
If you lower the amount of credit by closing accounts, then the ratio of debt to available credit can appear worse than it actually is.
If you have dormant credit cards that require annual fees, then it makes sense to close those, but do so gradually, not all at once.
Also select newer accounts over old ones that have built up a credit history.
Good customers have longer credit history and closing those old cards is like deleting your financial past.
2.
I've got credit cards, but I never use them.
This isn't quite as bad as closing your accounts, but it can have negative consequences.
In some cases, a creditor will decide to close the account due to lack of use, and in turn removing any history of use from your credit report.
In a similar scenario, a creditor may not close your account, but may stop reporting it to the credit bureaus, which will have the same affect.
3.
It's OK to have a large balance, as long as I pay it off.
Sounds simple, doesn't it? I mean why do they bother giving you that juicy credit limit? Unfortunately, racking up your card sends off alarms with FICO scores.
Customers who run high balances, even if paid off every month, negatively effect the whole debt to ratio scenario discussed above.
It appears on paper as though you've maxed out your cards instead of keeping them at a manageable limit.
4.
So and so is offering a better interest rate, let's apply for their card too.
Keep in mind that your length of credit history accounts for 15 percent of your credit score.
If you've had one credit card for ten years, that gives you ten years of history, which is a good thing.
However, if you have four cards under two years old, and one at ten years old, all of those time frames would be averaged together, decreasing down your overall score.
In addition, every time you apply for credit it results in a hard inquiry against your credit report.
Many of these inquiries in a short span of time looks suspicious, and may suggest illegal activity.
These inquiries don't count against you in cases of auto loans or mortgages where a borrower may be doing some legitimate shopping around for the best rate.
5.
What does an overdue library book have to do with my credit? These days credit can be used to pay for pretty much everything from library dues to dog licenses or municipal water bills.
If you pay faithfully every month, no one finds out about it, but the minute a collection agency reports the payment as past due, it shows up as a black mark on your credit report.
6.
There is a mistake on my credit report, but it's too much of a hassle to fix it.
It's worth requesting a credit report every now and again to ensure the report is indeed correct and you aren't being penalized for something in error.
7.
I can't afford to make a payment this month, but I'll send double next month.
Missed or late payments are the easiest way to trash a credit score.
Just as your mother probably told you, make sure you make at least the minimum payment and ensure it arrives before the due date.
Apparently, according to FICO scores, not all overdue or missed payments are treated equally.
A past blemish from two years ago where you were 90 days late is not as bad as a recent late payment of only 30 days.
The recent indiscretion may be an indicator of a future pattern of lateness.
Lenders are not so much concerned with the actual credit score numbers as to the problems they may be pointing to.
If you were to divide credit score indicators up as pieces of a pie, this is how they would look: Payment History: 35% Amounts Owed: 30% Length of Credit History: 15% New Credit: 10% Types of Credit Used: 10%