Killing your credit
Posted on July 12, 2006 7 Comments
NOTE: I am totally cheating by simply pasting links here lately, but things have been crazy buzy for the last two weeks.
I’ve had friends and family in town and have been out sightseeing with them. I’ve seen two plays with cousins this week (Wicked is sooooo fun … I can’t stop singing “Popular” in my head), spent two weekends in a row going out like a rock star BOTH nights (a general no-no in this Budgeting Babe’s book), saw a concert (the very talented Marc Broussard at Park West) and spent lots of quality time bonding with my best girl friends. (Apparently I’ve also developed a fondness for parenthesis this week in my literary laziness.)
All of which leads me to say that budgeting does not have to be boring. If you can save throughout most of the year, typically only go out one night a week, are thrifty – nay, savvy – in your spending and manage your budget responsibly, a few weekends of splurging smattered throughout the year are OK. Luckily in Chicago, the weather dictates that we practically do nothing except huddle under covers nine months out of the year, so I don’t have a problem regularly exceeding my “going out” budget. If I lived in California, though, this wouldn’t be the case!
Back to my post. CNN has a great article on the top five credit killers. Who knew those old parking tickets you incurred while staying over at your suburban boyfriend’s house in ’02 would have an effect on your credit today?
5 ways to destroy your credit
Snapping up department store credit cards or skipping out on that parking ticket could send your credit score tumbling.
By David Ellis, CNNMoney.com staff writer
July 12 2006: 11:33 AM EDT
NEW YORK (CNNMoney.com) — Taking a wrecking ball to your credit rating is probably best likened to striking a match and burning all of the cash in your wallet.
The concept is simple: a bad credit rating means higher interest rates and ultimately less savings for you.
Your credit score, or your FICO score, ranges from the worst possible score of a 300 to a perfect 850, and is determined by such factors as paying your bills on-time, the amount of money you owe as well as the length of your credit history, according to the company Fair Isaac, which runs the scoring system.
But even if you are one of those individuals who is diligent about maintaining your good credit standing, it is still possible that with a few simple missteps you could send your credit score into a tailspin faster than you can say delinquency.
So while closing out those credit card accounts you don’t use or rolling over all your outstanding debt to one card may seem like sensible moves, you might actually be killing your credit rating.
Late payments
The easiest way to lower your credit score is through delinquent payments or by skipping out on a bill altogether.
Since your payment history makes up 35 percent of your credit score, failing to make the minimum payment within 30 days of the due date could send your score plummeting, says Craig Watts, a spokesperson for Fair Isaac.
Say for example you’ve never missed a payment and have a credit score in the high 700s or low 800s. If you were to miss the 30-day grace period, your score could drop by 100 points or more.
“That first delinquency puts you in a different class of consumers,” says Watts. “You can make up that 100 points but it will take a lot longer than it took for that score to fall.”
High card balances, low FICO score
Maxing out your credit cards or pushing your account to its limit is another surefire way to bring down that FICO score, says Watts.
Experts say that consumers should aim to keep the balance on their credit card accounts no higher than 35 percent of their credit line. That means if you have $1000 credit limit on your card, try to keep the balance no higher than $350.
“The lower your debt compared to your credit limit, statistics show you are a better credit risk and that you have more self-control,” says Watts.
That also means you might want to reconsider consolidating all of your credit card debt onto one account, especially if that means the new balance is close to your credit limit.
Closing credit cards
Ok, ok, we know what you’re thinking: ‘I’ve got an unhealthy number of credit cards in my wallet, I think I’ll start closing those out to help my credit score.’ Not so fast, warns Steven Katz, a spokesperson for TransUnion, one of the country’s three major credit reporting agencies.
Since part of your score is based on the length of time certain lines of credit have been open, closing out that 10-year old credit card could take a bite out of your credit score.
“It’s negative because it’s taking away a reference to a positive credit history,” says Katz.
And if you are trying to trim down your debt by hopping from one low-interest rate offer to the next, closing cards along the way, Katz warns that kind of behavior could send a message to future potential lenders that you might be a credit risk.
Too many in-store cards
It’s always a temptation at the checkout line, but signing up for a Home Depot, Macy’s or any in-store credit card just to get a 10 percent or 15 percent discount may work against your FICO score.
Even if you vow to promptly pay them off, opening up several of these accounts in succession could spell trouble for your score because opening multiple lines of credit in short period of time is considered abnormal behavior by credit agencies, according to Fair Isaac, and it suggests that you might be more of a credit risk.
Fines that add up
A $30 library fine or a $75 parking ticket. Who cares, right? Well, that could be changing, says Watts.
More often nowadays, municipal governments are turning outstanding fines over to collection agencies, who have the ability to trash your credit rating if you don’t pay up. Watts says that if a collection agency reports you were not able to pay that overdue library fees or parking ticket, that could drop your credit rating by 100 points or more.
“That will hammer your score,” says Watts. “Make good on that bill because you don’t know who is or who is not reporting to collection agencies.”
And while you may think you can’t be bothered with those petty fines now, just imagine how much more they’ll end up costing you if the collection agency mangles your credit score and you end up with a higher interest rate on that 30-year mortgage.
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7 Responses to “Killing your credit”
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July 13th, 2006 @ 5:30 am
There was an interesting report last night about the credit reporting system we use in Australia. It’s based on negative reporting – in that good payment history isn’t taken into account, only queries and defaults. They’re trying to make it more like the US or UK system as this one unfairly targets people who apply for credit many times over, regardless of whether or not they take it up.
It annoys me that the fact that I pay my credit cards off consistently every month doesn’t show up, only the fact that I have $10 000 worth of credit. Looking at that, combined with my salary, nobody will give me a home loan worth anything because I could be a risk. *sigh*
And library fines etc show up here too and most people have no idea either.
Off topic, it’s great that you’ve been busy and having fun – showing the rest of us that budgeting does not have to equal boredom
July 13th, 2006 @ 4:46 pm
I saw Wicked for the second time on Sunday — and I can’t stop singing Popular either! It was to the point that I downloaded it off iTunes!
Love your blog!
July 15th, 2006 @ 5:34 am
Summer in Chicago is worth a few splurges. That’s one of the best reasons to live there! I miss it.
July 15th, 2006 @ 8:47 pm
Wicked is a great play. I saw it a few weeks ago here in NY. I will be getting the soundtrack.
July 17th, 2006 @ 6:44 pm
First, happy almost birthday. My 26th is next Monday! Hooray for July babies.
More importantly, I recently read Suze Orman’s The Money Book for the Young, Fabulous & Broke and wondered if you read it/ what you thought. I was thinking of this because Orman writes a lot in laymans’ terms about credit/ FICO ratings, how to screw them up, how to fix them, and why they are so important.
For me personally, YF&B combined with reading your blog regularly have been great motivators for me to get my credit rating healthy for the first time in my adult life, contribute the max to my 401(k) and even start preparing for the oh-so-grown up tasks of saving up for a house and a car someday in the hopefully not-way-too-distant future. It makes a big difference to hear ideas from someone else that is in a similar situation to myself (mid-twenties urban dweller) or who at least can sympathize with our plight!
August 31st, 2006 @ 7:40 pm
You got good sense to live frugally and on a budget; it’s the way to get ahead with the dough. That’s the problem with most people … they don’t save the cash before having a bash, but you do. Great job, dollface.
February 18th, 2010 @ 7:52 am
There are lots of things to be thankful for but i guess none of them is my debts. I don't want to sound bitter but it is something i can hardly be proud of. My family knows about all my debts, they really wanted me to help on this but then, all of them have their own life too, until they discuss me about the free credit repair and the credit report score, I really work on hard just do get over it. Now I am trying to budget everything. specially nowadays all people are having a bad credit because of ongoing crisis.
your blog post inspired me too budget my income well.thanks for sharing! great job! keep posting =)
Thanks,
Gabby