When we're kids, those shirts in the bedroom closet can look like lurking monsters. Without a nightlight, the dark can seem ominous and chilling. When we're a little older, our fears turn to horror movies, roller coasters and pop quizzes. But for grownups, there's nothing quite as dark and creepy as a steadily dropping credit score, that mysterious number that determines how favorably you're viewed by all types of lenders from credit card companies to mortgage issuers.
Credit scores may be enigmatic, but a few precautions will help keep the monsters at bay. It's not quite as simple as going out to the store and buying wooden stakes and garlic, but as long as you're on solid financial footing to begin with, a few simple practices will help keep your credit score safe. Stay away - far away - from these five sure-fire credit score killers:
- Paying late
Even one day late isn't smart, because of the late fees that can be triggered, but what will really hurt your credit score is "when you're 30 days late or more," says Tracy East, director of outreach and social media for CESI Debt Solutions, a nonprofit credit counseling service. "It's impossible to say how much your credit score will drop because the credit issuers use an algorithm that has many parts," says East, but she can give consumers a ballpark idea.
Not long ago, she had an incident with a credit card company in which two payments weren't recorded properly, making it look like she had two late payments. She was able to get everything resolved, but in the ensuing period from discovering the problem until she was able to get things fixed, she saw her credit score drop 75 points. All from two late payments.
Applying for too many credit cards
Crazy as it might sound at first glance - hey, I'm just applying to get a credit card and sent in a few applications, what's the big deal? - lenders always think of the worst case scenario when they see that you've applied for a handful of credit cards.
You, as a consumer, may have very innocent motives for applying for, say, three credit cards in one evening (i.e., you'd like one card to rack up rewards points, another for emergencies and perhaps another for your business), but a lender assumes that you're utterly broke and trying to raise cash in a hurry without worrying about how you're going to pay it all back.
On the other hand, if you apply for several car loans or mortgages all at once, lenders typically get that you're looking for the best deal and you aren't trying to buy four cars or nine houses, and they typically won't ding your credit score.)
Not using credit cards at all
It is perfectly possible to not have credit cards and still have a high credit score. If you've been around the block a few times, and you have a long history of making timely payments on utilities, car loans and mortgages, your credit score will likely be just fine. But using credit cards wisely is a useful way to show a lender that you're responsible with your money, and it can be a relatively quick way to develop a credit history.
"You have to establish a payment history to have a good history," says Sara Robicheaux, an associate professor of finance at Birmingham-Southern College. "I always tell my college students that the first thing they need to do when they get their first job is apply for a credit card and get bills put in their name. This is to help them start to establish a credit history. The length of the credit history makes up about 15 percent of the credit score."
Maxing out all your credit cards
Even if you're paying everything on time and haven't been late in 20 years, your credit score will suffer if your revolving debt (which isn't a great idea to carry, anyway) is too high in relation to your income. That's because if you're always maxed out, lenders assume you don't have a ton of cash at your disposal - if you did, you wouldn't likely have maxed out cards - and that one significant setback, like some hefty hospital bills or your losing your job, could keep you from paying off your debts.
"You should never utilize more than 50 percent of your credit limit," advises East. "Once you go over that threshold and especially when you reach 75 to 90 percent of your credit limit, it starts having a negative impact on your credit scores."
If anything will drive a stake in the heart of your credit score, well, this is it. That said, it really depends where your credit score is to begin with. If you have a formidable credit score in the 700s, but something recent has happened that has financially devastated you, and you declare bankruptcy, then, your credit score could easily plummet two hundred points. (On the other hand, if you're declaring bankruptcy after years of late and missed payments, and years of maxed out credit cards, your credit score may not have much farther to fall.)
But if, despite your best efforts, one of these serial killers manages to strike a blow to your credit, there can be a happy ending to any of these tales of horror. Credit scores don't always adhere to the laws of gravity. What comes down can go up. But be always on your guard, for like Dracula, the Mummy, the Werewolf, Freddy Krueger and every other scary Hollywood movie character out there, credit score serial killers can always come back to life.