As Dallas bankruptcy lawyers we are often asked by our clients about what helps and what hurts their credit scores. Bankruptcy hurts, of course, but you can recover from that over time. There are other actions you can take, usually in a futile attempt to avoid or delay bankruptcy, that also can hurt your credit score.
Sometimes it’s best to just bite the bullet and file for bankruptcy. That way you can preserve your money for your family, rather than lose it all by trying to pay bills you can’t afford. You also may be able to avoid foreclosure, and foreclosure can have a terrible effect on your credit score.
CNNMoney.com recently ran a good article about five bad habits that can kill your credit score. Here are some highlights:
Your FICO score is a measure of your creditworthiness that ranges from 300 to 850. It’s the FICO score that most lenders look at when they check your credit. Lenders have already raised their standards by about 20 to 40 points this year, according to Barry Paperno, consumer operations manager at FICO.
FICO focuses on five categories when calculating your score: How much debt you have, your payment history, your debt utilization ratio (how much you owe in relation to your credit limits), how far back your credit history goes and your mix of various types of credit.
Here are a few things that can wreak havoc on your score and wreck your chances of getting an affordable loan:
1. Making late payments
A single late payment on a credit card or other loan could ding your score by as much as 110 points if you already had a great score and 80 points for someone with an average score. So the best thing you can do to improve your score is make payments on time.
2. Carrying a big balance
Your debt to utilization ratio accounts for almost 30% of your score. So carrying too much debt will not only cost you a fortune in interest, it can also destroy your credit rating.
3. Closing a credit line
As credit card companies jack up interest rates and add inactivity fees to compensate for lost revenues, it’s tempting to just close your accounts. But closing a line of credit could impact your debt to utilization ratio.
4. Opening a credit line
"When you open a new account, you’ll knock some points off your score," said Paperno. "The reason why is that the people who open new accounts tend to be of a higher risk level immediately after opening a new account."
5. Defaulting on a loan
Defaulting on a loan is the single worst thing you can do for your credit, said Rex Johnson, founder of credit union consulting firm Lending Solutions Consulting.
