Credit scores are sort of mysterious, aren’t they? It’s tough to be sure what gives you good credit, what gives you bad credit, and what exactly the difference is.
First of all, let’s establish what it means to have good credit: it’s any FICO credit score above 680. Bad credit is any credit score below 550. The worse your credit, the worse rates you’ll be looking at for any kind of loan, and the fewer lenders will be willing to offer you a loan at all.
You probably know that failing to pay your bill on time is a big no-no when it comes to keeping a good credit score, but there are multiple factors you might have not even considered. Here are some of those factors!
Cosigning on a loan.
You’re a responsible person and a good friend. Someone you know is having trouble qualifying for a loan and needs you to sign on with them. It’s just a signature, right?
Wrong! You’re leaving your credit future in their hands. As nationally recognized credit expert Jeanne Kelly told us:
“Many people do not understand that the loan they just cosigned is just as much their responsibility as the other person they signed for. The loan and payment history goes on both of their credit reports. If the other person pays late, it will get reported on both their reports. If the other person lets the loan go into default, the cosigner is responsible for the balance. I wish lenders stopped using the word ‘cosign,’ as for some reason people do not realize the full impact. I wish they would just call it a joint loan.”
Closing old credit cards.
You know acting irresponsibly with your credit cards will mess up your credit score. But some behavior that seems responsible may actually hurt your credit.
Per certified financial educator Maggie Germano: “There are many things that can negatively impact your credit score, and some of them aren’t what you’d expect. For example, closing your old credit cards can hurt your credit score, because it shortens your credit history. So if you have old cards that you don’t really use anymore, keep them open. Another thing that can hurt your credit score is if something is sent to collections. Is there an old electric bill you never paid? Perhaps a medical bill that you couldn’t afford? Track those bills down! Pay them off before they go to collections and get reported on your credit report.”
A hard credit check.
Most legitimate lenders will want to perform a credit check before determining if they’ll lend to you. That’s because your credit score is seen as an indication of your likelihood to pay back the loan you take out. But not every credit check is equal! There are both soft and hard credit checks.
Trent Hamm of The Simple Dollar wrote an article explaining the difference. As Hamm says, hard credit checks are “ones where you’ve granted permission, they indicate that you’re actively seeking credit, they show up on your credit report for everyone to see, and they tend to have a slight negative impact on your credit score.”
“A soft credit check, on the other hand, doesn’t require your permission, doesn’t indicate anything about your interest in seeking credit, only shows up on the credit report you see, and has no impact on your credit score,” Hamm explains.
If you need a “bad credit loan” from a lender who will consider you even if you have less than ideal credit, it’s better to apply to lenders who perform a soft credit check, so that your credit score isn’t harmed further. And it’s much better to consider a lender who performs a soft credit check than no credit check at all, as that can be a red flag that they don’t expect you to be able to pay back the loan and might be trying to trap you into a cycle of debt.
Receiving a “charge-off.”
You know missing payments is bad, but you may not have realized how bad it can get. Miss too many credit card payments and the credit card company will decide you aren’t likely to ever make those payments. That’s when they hit you with a charge-off.
How does that work? According to LaToya Irby in an article she wrote for The Balance: “Once your account is charged-off, you will no longer be able to make purchases with the account. However, you still owe the charged-off balance.
“The creditor will report a charged-off account status to the credit bureaus. This status will remain on your credit report for seven years from the date you first went delinquent. In the future, when creditors and lenders pull your credit report, they’ll see you once were late enough to have a charge-off.”
Irby goes on to explain how this impacts your score: “Your credit score will drop after a charge-off. Payment history weighs heavily in the calculation of your credit score. An unpaid charge-off will affect your credit score more when it first happens. As time passes, your credit score can improve if no additional negative entries are placed in your credit report.”
Missing a payment is bad for your credit score, but missing multiple payments should be avoided at (nearly) all costs.
Having a high credit balance.
Last time we wrote about managing your credit score, we asked author and debt expert Gerri Detweiler for advice. She told us about the importance of having a good credit balance.
It’s not enough to just pay your credit card bill each month. According to Detweiler, you want to make sure you keep your balance at around 20-25% of your credit limit.
She also warned that most issuers report balances before your payment is received, so even if you’re paying your bill back in full, you’ll still want to keep that balance from getting too high or risk negatively impacting your credit score.
Not having a credit balance at all.
Alright, so if racking up too many charges on your credit card can hurt your score, wouldn’t it be better not to have a credit card at all?
Nope! That’s also bad for your credit. In a Forbes article presented by Rent.com, the authors caution against having too few kinds of credit: “having just a single type of credit can decrease your score. That means even if you’re building credit by paying student loans or in some other way, a credit card can still help you make your credit history more diverse.”
If you don’t think you’ll be able to qualify for a credit card, you can consider a secured credit card. A secured credit card requires you to put down some money as collateral, but it will allow you to start building up your credit score so you can qualify for a regular credit card one day, should you choose to do so.
Paying for a rental car with a debit card.
That same Forbes article offers another quirky way you can hurt your credit score. Apparently “For some car rental companies, when customers use a debit card it causes them to order a hard inquiry on their credit.” That’s why they advise you “Pay with a credit card or check the rental application to keep this from happening.”
It’s hard enough just paying your bills on time without worrying about the sneaky ways you can hurt your credit score without even realizing it.
Maggie Germano (@MaggieGermano) is a Certified Financial Education Instructor and financial coach for women. Her mission is to give women the support and tools that they need to take control of their money, break the taboo of discussing debt and income, and achieve their goals and dreams. She does this through one-on-one financial coaching, monthly Money Circle gatherings, her weekly Money Monday newsletter, and speaking engagements. To learn more, or to schedule a free discovery call, visit maggiegermano.com.
Jeanne Kelly (@creditscoop) After being turned down for a mortgage 15 years ago, Jeanne Kelly realized she needed to get her credit in order. Not only was she able to fix her bad credit, but she took the skills and knowledge she gained and decided to share it with the world. Now she’s a nationally regarded credit coach and expert, with multiple books and television appearances. Follow her on Twitter and check out her site to get the credit help you need!
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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.