The average American credit score has risen steadily since the Great Recession. The national FICO score average is now 704. If you have good credit, your main concern should be avoiding mistakes that may lead to this score getting lowered.
By finding out what hurts your credit score, you can use this information to keep your credit in good shape. Without good credit, you will find it hard to do things like getting approved for car or home loans.
Not only will you need a good credit score to make these larger purchases, you will also need to save money. One of the biggest trends in the world of savings is the 12-week challenge. This challenge requires you to save between $100 and $150 a week for 12 weeks.
The following are some of the things you need to avoid when trying to keep your credit score high.
1. Missing Payments is What Hurts Your Credit Score the Most
If you are like most consumers, you have a number of credit card minimums and loan payments to make each month. While keeping up with these payments may be difficult, you need to avoid missing one by mistake.
Not only will missing a credit card or loan payment lead to additional late charges, it can also hurt your credit score. A payment that is over a month late can lead to a credit score being reduced by nearly 90 points.
The last thing you want to do is significantly reduce your credit score due to a mistake. This is why you need to get organized when it comes to when payments are due.
2. Avoid Maxing Out Your Credit Cards
Did you realize credit card utilization accounts for nearly 30 percent of your credit score? This means that the lower your credit card balances are, the higher your score will inevitably become.
Practicing a bit of restraint when it comes to credit card spending is vital. Maxing out one or more credit cards is a horrible idea that could cost you dearly.
Higher credit card balances will lead to your monthly minimums increasing, while your credit score decreases. Maxing out your credit cards can reduce your credit score by up to 45 points.
3. Too Many Hard Inquiries Can Affect Your Credit Score
Every time you attempt to get a loan or a new credit card, a hard credit inquiry will usually be performed. Lenders need to pull your credit report to ensure you are a good candidate for a new loan or credit card.
Applying for a number of different loans or credit cards in a short time frame can lead to a number of hard credit inquiries being generated. Instead of hurting your credit score with the inquiries, you need to be selective about applying for new lines of credit.
Doing some research before applying with a particular company is a must. With this research, you can figure out which lender offers the best terms on the loan you need. Once you have this information, you can apply for one loan instead of a handful of them.
4. Steer Clear of Charge-Offs and Collections
Having unpaid debt can affect your credit score in a negative way. If you avoid making an attempt to pay a particular debt, the company that holds this debt may sell it to a third-party collection agency.
While this may not sound like a big deal, it can actually hurt your credit score. In some instances, a company will classify your debt as a charge-off. Basically this means that a company is removing the debt from their books due to it being unpaid for a long period of time.
Checking your credit report regularly can help you find issues with unpaid debt. Taking out a personal loan to pay off these debts is a good option. If you are looking for information about the best personal loans on the market, you can read more here.
5. The Damage Done by Bankruptcies and Foreclosures
Being unable to pay your debts will put you in a very compromising position. Often times, people who are unable to make these payments will have to file for bankruptcy.
If you are unable to pay your mortgage, the bank may decide to foreclose. A bankruptcy can lower your credit score significantly. The negative mark left by a bankruptcy can stay on your credit report for up to 10 years.
A bankruptcy or foreclosure can lower credit scores by up to 240 points. Contacting your creditors and letting them know about your financial hardship is a step in the right direction. Usually, lenders will offer a reduced payment plan designed to help you avoid foreclosures and bankruptcies.
6. Debt Consolidation Should Be Avoided
Some consumers think that consolidating their debt into one easy to make payment is a good idea. While a single monthly payment may be helpful for you, it can be damaging to your credit score.
Generally, companies that offer debt consolidation loans will have to pull your credit report. This means you will have a hard inquiry, which as previously mentioned can lower your credit score.
Paying off mounds of credit card debt can be a daunting task. By doing this on your own without the help of a consolidation loan, you can avoid affecting your credit in a negative way. Meeting with a financial advisor is a great way to get a plan of action when attempting to pay off debt.
Focus on Keeping Your Credit Score High
Getting low-interest rates on loans and increasing your buying power is easy with good credit. Now that you know what hurts your credit score, you can avoid making these mistakes. Keeping your credit card utilization low and your savings high can benefit you and your family.
Looking for more information on paying off your debt? Be sure to check out our article on how to create a debt avalanche.