Law Office of Rick Morin, PC

Credit scores are important. Your credit score impacts your ability to pay for large purchases over time. Lenders will use poor credit scores to deny loan and credit card applications.

Bad credit will cost you money too. Lenders generally charge higher interest rates depending on credit score. Some service providers may even require you to pay a security deposit based on your credit score.

What hurts a credit score?

According to the Fair Isaac Corporation (FICO), there are five major categories that determine your credit score. The most important factor is your payment history, accounting for 35% of the calculation. Amount owed is the second biggest contributor with 30%. Length of credit history is 15% of the calculation, while credit inquiries and types of credit account for 10% each.

1. Payment History

Late payments on credit cards and loans can result in more than just late fees. If you are habitually late on payments, you could face a penalty increase in interest rate. After just 30 days, the late payment will be added to your credit report where it will remain for seven years.

If you decline to make payments altogether, creditors will charge off your account. Once charged off, you will no longer be able to use the credit card. You will also still owe the balance due. This is one of the worst hits your credit score can suffer. Similarly, if you fail to make payments on a loan, the account will default. This will be reflected on your credit score as well.

2. Amount Owed

The level of debt you have is measured by your credit utilization, or the ratio of your credit card balances to their respective credit limits. Having high credit card balances can demonstrate irresponsibility with credit, and cost you points in your credit score.

Ideally, all of your credit card balances will remain at or below 30% of their maximum limit. If you frequently max out your credit cards, this could adversely affect your score—even if you pay the balance off when the statement comes!

3. Credit History Length

The longer your credit history, the better your credit score. Once you cancel a card, the years of use are erased from your credit history. Canceling an old card will therefore make your credit history seem shorter than it actually is. You should hold on to old credit cards once they are in good standing.

Also, closing cards will raise your credit utilization—your overall balance remains, but you will have decreased your total maximum limit.

4. Credit Inquiries

Each time you submit an application for a credit card or a loan, you are authorizing the lender or business to access your credit report. The number of requests made is recorded and factored into your score. Be cautious about the number of loans and credit cards you apply for. Excess inquiries will reduce your credit score.

5. Credit Types

A diverse credit history signals responsible management of credit. Therefore, having only loans or only credit cards has the potential to hurt your score. When building credit, it is important to have an array of different accounts.

Like it or not, credit scores are a big part of life. Bankruptcy can help you get a fresh start with your finances. Call (916) 333-2222 to discuss if bankruptcy is a good option for you.