If you're like most consumers, you do not spend much time thinking about your credit history. You may think that, as long as you pay your bills on time, your credit history and associated credit score must be shiny and clean. However, many of the usual money habits can have a detrimental effect on your credit score even without your knowing it. Keeping these money errors to a minimum will help keep your score high.
Credit consolidation
The popular financial planning tool used by banks and personal advisors is taking some or all of your old debts and putting them into new consolidation loans. The main objective of this strategy is to refinance debt with lower interest rates, and to lower total monthly minimum payments. While both of these results can help your overall financial picture, getting rid of older debt can hurt your credit score. Part of the score is determined by the length of your credit history, and an open debt account that has a timely payment track record will increase your score. Closing all of them and rolling them into new loans can lower the score significantly, especially if it reduces your overall available credit. If reducing the interest rate you pay for loans and credit cards is the goal, try to negotiate a lower rate with existing creditors before choosing consolidation.
Shopping Debt
Everyone wants to get the best interest rates for mortgages, car loans and credit cards. This is a solid financial strategy. However, financial institutions that consider lending money almost always run a credit check to make sure that you are at great risk. Multiple access requests on your credit file in a short time can lower your score. In the eyes of the developer of the credit score, this activity may indicate that you are scrambling to get a new credit and cause a red mark on your report. Since 2009, scores have been adjusted to take into account this type of activity, but it can still have an effect. To minimize the so-called "hard click" on your credit report, discuss early with the lender without agreeing to a credit investigation. That way, you can make a final decision with a single lender, who will run a credit investigation before completing the loan. Run a copy of your own credit score (which does not result in a hard knock) and give it to the lender so they can make an early decision based on your credit history.
Refused to Pay
At some point in your life, you tend to enter into disputes with vendors or creditors. Maybe the cool new blender you bought online went bankrupt as soon as you got it at home, or the incredible financial bill you think you should pay. Unfortunately, most vendors have a big stick when they have to force you to pay. They can threaten to send the amount owed as collection items on your credit report, thereby dropping your score. There is a process in place with all three major credit bureaus to handle the dispute, but the collection will keep your report for a while. If the bureau receives enough evidence from the vendor that you owe the amount, it will remain in your report for the full seven years. Try to resolve the payment dispute in a timely manner to avoid this situation. It may take repeated letters or phone calls to senior people in vendor organizations, but it takes time and trouble.
Closing the Credit Card
It may seem like the best way to manage your financial situation wisely is by closing credit cards that you do not use. Part of your credit score, however, is determined by the amount of revolving debt you have (such as credit card and line of credit) versus the total amount available to you. The lower the ratio, the more positive the impact will be on your score. This shows that you have access to credit and do not use it indiscriminately. If you close some of the available rooms, the ratio rises and your score goes down. This is especially true when you close a credit card that has a balance. The balance will remain in your report and the available space will be gone. Spread the use of your credit card between all your cards and make sure to make timely payments to keep your score high.
Note: Your financial habits can have a significant effect on your credit score, and you should consider the impact before making major changes to your debt structure.
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