The Silent Credit Killer Lurking in Your Bank Account
Avoid These 7 Credit Killers
By John Ulzheimer
FEBRUARY 26, 2015
When a consumer embarks on the journey toward building better credit he will normally focus on the positive steps he can take in order to improve his credit scores. Paying bills on time, lowering balances, and avoiding excessive applications are all ways to improve your scores. And while learning how to improve credit is always a smart move, it is also equally important for consumers to “first, do no harm.” You can accomplish this by becoming familiar with the various credit killers that almost always lead to lower credit scores.
- Not Knowing the Score
It is the consumer’s responsibility and the consumer’s responsibility alone to keep an eye on his credit reports and credit scores. Unfortunately when credit problems do occur most consumers are not even aware of their existence, until they apply for a loan. By then it’s arguably too late. Smart consumers know that routinely checking their credit reports and scores is a must. Plus, given the number of methods to get free credit reports and scores on a monthly basis, there’s simply no excuse to not do so.
- Late Payments
Perhaps the fastest way for a consumer to destroy his credit scores is to start making late payments on his credit obligations. 35% of a consumer’s FICO credit scores and 40% of their VantageScore credit scores are assigned from the “Payment History” category of his credit reports. When late payments occur they are almost guaranteed to have a negative score impact. A commitment to always making payments on time is crucial.
- Debt to Credit Limit Problems
Many consumers are unaware of the fact that credit card debt can be very damaging to their credit scores, even if all of the consumer’s credit card bills are always paid on time. Credit scoring models like FICO and VantageScore are very focused on the amount of credit card debt that appears on a consumer’s credit reports. And, those debts are often measured relative to their credit card limits. To make a long story short, too much credit card debt will absolutely lower credit scores.
- No Emergency Fund
Technically the lack of a savings account for emergencies will not harm a consumer’s credit scores. After all, information regarding income or savings is not included on a consumer’s credit reports. However, indirectly the lack of an emergency fund certainly can set a consumer up for credit problems in the future. Without a properly sized emergency fund a consumer who is faced with a financial disaster such as job loss or illness will generally be forced to turn to credit cards and, as mentioned above, high credit card balances damage credit scores. It is also worth noting that when credit card balances begin to climb late payments on credit obligations are often not far behind.
It will probably surprise no one to find “bankruptcy” on a list of credit killers. Filing for bankruptcy protection from creditors certainly has its benefits for certain consumers however those benefits come at a very steep cost in the credit score department. Bankruptcy is the worst thing you can do to your credit scores because the record of the filing will remain on your credit reports for up to 10 years. And while it may not be the worst option, it should always be the last option.
Collection accounts can cause significant and long lasting credit score damage. In fact, when a collection account claws its way onto a consumer’s credit report it can remain there for 7 years from the date of default on the original obligation. Thankfully, in many cases collection accounts can be avoided. For example, if a consumer receives a medical bill he cannot afford to pay in full then he may be able to work out an affordable payment plan with the original creditor. Making payments on time and always staying in communication with creditors are two of the best ways to avoid collections from occurring in the first place.
- Serious Derogatory Credit Items
In addition to the items listed above there are several other derogatory items that have earned the ominous title of “credit killer.” Court judgments, tax liens, repossessions, foreclosures, and settlements are just a few of the other types of serious derogatory credit items consumers will want to avoid.