Your credit score may only be a number, but it can make a huge difference in your financial future. This three-digit number is used by all sorts of financial institutions to determine how big of a credit risk you are. Your FICO score not only determines whether you will be approved for a new loan, but it also helps you score a new rental, get cheaper car insurance, and sign up for new utilities without a huge security deposit. By understanding what items can damage your credit score, you can better manage your finances and take control of your future.
One of the worst things you can do to your FICO credit score is make late payments or skip them altogether. Payment history makes up 35% of your score and includes information from credit card companies, personal and installment loans, retail accounts and mortgages. It will also include past foreclosures, defaults and bankruptcies. While a single late payment can certainly lower your score, several past due payments or delinquent accounts can completely sink your score for years to come
Some types of credit checks will actually show up on your credit report, but it is important to understand the difference between the types of credit checks. Soft checks do not actually affect your credit report and are only used to see if you can prequalify for a loan or credit card. These checks may also be done yourself when you check your credit report each year or by an employer checking your background report. However, a hard check affects your credit and is performed when you apply for a mortgage, credit card or any other type of loan. This check actually becomes a part of your credit history. A hard check could temporarily lower your score by 5 to 20 points depending on the scoring method used.
Although you may be tempted to close credit card or retail accounts to keep yourself from spending more, it would be better to cut up the card and keep the account open. When you close an account, you are decreasing your amount of credit. Plus, if you close your oldest account, you could significantly decrease your score because 15% of your score is based on the length of open lines of credit.
High balances are second only to late payments in their impact on your credit score. The amount you owe related to the amount of credit you have is your credit utilization ratio, and it accounts for 30% of your score. In general, you should keep the amount you owe on credit cards to no more than 33% of the credit you have. When you have high credit card balances, you show potential lenders that you may struggle to pay back your loans.