Don't Hurt Your Credit Score - Avoid These Four Things

Don't Hurt Your Credit Score - Avoid These Four Things
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Trying to keep your credit score high, then avoid doing these four things.

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If you're planning to apply for a mortgage, car loan, or new credit card in the near future, you need your credit score to be as high as possible. Your credit score measures your past ability to use credit responsibly as well as your current risk to lenders. Any small changes that make you look less responsible or more risky can send your score plummeting. Here are some things that will drop your score.

Missing A Payment

Missing a payment is one of the worst things you can do. In addition to being one of the largest factors in your credit score, it's also almost an all or nothing factor. Even one late payment can dramatically drop your score, especially in the short-term. If you don't make up that payment, a late payment will be added to your credit report every month, and the later you are, the worse the impact is.

In addition, a late payment can set off a chain reaction of other lenders reviewing your account because they're afraid you won't pay them. If they close your account or reduce your credit limit, you could see your credit score drop even more.

Maxing Out A Card

Your credit utilization ratio is the second largest factor in your credit score. It's measured as the percent of your available credit that you're using, and it drops exponentially as you get closer to 100%. Maxing out all of your cards is very bad, but maxing out even one card may cause a big hit to your score. Even if you have a very good reason, such as taking advantage of a 0% financing offer, the drop will be the same and could cause all of your lenders to review your account status.

Being over the limit creates the largest drop. There are also big drops or jumps when you cross 90% and 75% of available credit. When you are below 50%, the effect becomes lower, and under 30% is the ideal range. To maximize your credit score, keep a balance of 1% to 9% on a single card, and have the others at 0%. Of course, Living Below Your Means and not carrying any balance is an even better way to go.

Opening New Credit Cards Or Taking Out New Loans

Each time you apply for new credit, your credit score drops. First, each application creates an inquiry on your credit report that drops your credit score for up to two years. Second, when a new account is opened, the average age of your accounts, another factor in your credit score, is lowered.

The idea behind the score drop is that people applying for a large amount of credit in a short time may be desperate for credit due to financial problems and may be unable to repay their debts. When lenders have a longer credit history to look at, they have more data that can help them be more certain of the riskiness of lending to you. The good news is that when you're shopping for a car loan or mortgage, those applications are only counted as a single inquiry so your score won't drop as much.

Paying Off A Loan

Paying off a loan is generally viewed as a good thing, but this isn't always the case on your credit report. Regular payments on a mortgage, car loan, or other loan require a higher level of responsibility than meeting the minimum payment on a credit card. Because of this, lenders are more comfortable lending to people who already have a loan as long as your total payments aren't too high in relation to your income. Once the loan is paid off and falls off your credit report, they won't be able to see this positive history.