Monday, May 26, 2014

How to ruin your credit score

Warren Buffet once said, "It takes 20 years to build a reputation and five minutes to ruin it." The same could be said of good credit. It isn't built overnight or by accident. Most Americans with stellar credit scores have exercised financial discipline for years. That's why lenders are willing to offer them mortgages and car loans at favorable interest rates.
And like a good reputation, a strong credit score can be easily ruined. Here's how to devastate your credit score in four simple steps.
  • Max out your credit cards and don't make required payments. About 35% of your FICO score — the number between 300 and 850 (worst to best) that most lenders use when deciding whether to extend credit — comes from your payment history. Paying late or paying less than required minimums can wreak havoc on your FICO score and may signal to lenders that you're overextended.
  • Co-sign on an irresponsible friend's loan. There's a reason why your pal needs a co-signer — he or she is perceived as a high credit risk. If your friend defaults on the loan, you're responsible for the unpaid balance. As Shakespeare said, "Loan oft loses both itself and friend." And remember this: if you co-sign for a loan, the status of the loan will appear on your credit report.
  • Close credit card accounts in quick succession. Shutting down a credit card or line of credit account may adversely affect your debt-to-utilization ratio (how much you owe in relation to your credit limits). As this ratio climbs, your credit score will tend to sink. Say, for example, you have three credit cards and each has a $1,000 limit. You carry a balance of $500 on one of those accounts. That's a debt ratio of $500 to $3,000 or about 17%. If you close one of the accounts, the ratio will jump to 25% ($500/$2,000). Though you haven't accumulated more debt, your credit score may be hurt.
  • Default on your installment loan or home mortgage. This is another sure-fire way to trash your credit score. A home foreclosure, for example, may cause your FICO score to plunge by 200 points or more. And because most negative information stays on your credit report for seven years (ten years for a bankruptcy), lenders may be reluctant to offer you money for a very long time.

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