You may not know it, but you could be perpetrating a violent crime … against your credit. You may be a credit killer if you behave in ways that harm a valuable asset: your FICO credit score, a powerful three-digit number traditionally used by lenders to decide how much risk they’re taking by doing business with you.
Fair Isaac Corp., the leading provider of credit scores and creator of the FICO score, suggests we think of the score as a snapshot of our credit standing at a particular point in time. The score incorporates information from creditors on the way consumers use their credit, and falls somewhere between a poor rating of 300 and an ideal rating of 850.
Many people become aware of the score’s impact only after they’ve done something to mess it up.
John Ventura, a consumer bankruptcy attorney for 30 years and author of “The Credit Repair Kit,” has witnessed many credit disasters. He says many people filing for bankruptcy don’t know what numbers they need for a good or bad score.
Catherine Williams, vice president of financial literacy at Money Management International in Houston, discovered that nearly three-quarters of her firm’s clients knew that they had the score, but didn’t know what influenced it.
Credit killers revealed
Creditors and lenders constantly update credit information in your report, providing the opportunity to prevent and repair damage done by credit killers.
|1.||The Neglecter||4.||The Inquisitor|
|2.||The Postponer||5.||The Closer|
|3.||The Void||6.||The Relinquisher|
The Neglecter avoids reviewing the information used to determine his or her FICO credit score.
One in four credit reports contain errors that are serious enough to hurt a consumer’s chances of getting an apartment, job, home or car loan, according to a study by U.S. PIRG, the federation of state Public Interest Research Groups.
Consumers often neglect their credit reports, but the information in the reports generates the FICO credit scores. The score is calculated from five categories: your payment history, amounts owed, length of credit history, new credit and types of credit used.
Get free annual credit reports from each of the three major credit bureaus — Equifax, Experian and TransUnion — to prevent identity theft and avoid information mix-ups.
The Postponer destroys credit by habitually paying bills late or by letting them become delinquent. One late payment may temporarily hurt your score, and a delinquent account may leave it impaired and haunt your credit file for seven years.
Payment history accounts for 35 percent of the credit score. Avoid being tardy on your payments by keeping a list of monthly and occasional bills. Set up reminders in a calendar. Schedule automatic payments and keep extra money in your checking account as padding against temporary shortfalls in your budget.
The Void refers to the lack of history in your credit file. This desolate state causes lenders to wonder whether they should give you credit. They’re not sure because they have no evidence of how responsible you have been in the past. Having no credit is considered about as badly as having poor credit. Ten percent of your credit score involves the type of credit you’ve used.
Create a good mix of credit such as credit cards, a mortgage and installment loans. Opening a bank account, putting utilities in your name, getting a department store credit card and having a stable residence and job are ways to increase the likelihood of obtaining credit.
As an Inquisitor, you can cripple your account if you aren’t aware of the effect of account inquiries. A credit inquiry occurs whenever someone wants to look at your credit file.
“People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports,” according to Fair Isaac Corp.’s Web site, myfico.com.
Rate shopping for a car loan, a mortgage or a credit card can hurt your credit if you don’t do it properly. Lenders you approach ask credit bureaus for a copy of your report for review. This request shows up on the credit report as a “hard inquiry,” which affects the FICO credit score.
Inquiries fall within the “new credit” category, which makes up 10 percent of the score. It stays on your report for two years but is used in calculating your credit score only for the first year that it’s on your report. Minimize the impact by rate shopping within a short period of time, such as a couple of weeks. According to myfico.com, multiple inquiries from auto or mortgage lenders in a short period of time are typically seen as one inquiry and have little impact on your score.
Prospective employers interested in how you handle responsibility, companies that want to offer pre-approved credit cards, and even you may ask to see your credit report. These queries aren’t as bad because they are considered “soft” and don’t count against the credit score.
The Closer is trying to improve a credit situation, but his approach may not be the best move for that purpose.
Closing old and unused accounts could shorten the length of your credit history, which makes up 15 percent of the credit score. It also affects the credit utilization ratio, which is the amount of credit you’re using relative to your available credit. Closing an account makes your ratio go up because closing the account drops your total available credit while not reducing the amount of credit you’re using.
Also, watch your debts, because “amounts owed” account for 30 percent of the score.
Instead of closing the account, gradually pay down debts, keeping balances below 30 percent of the available limit, and space closures over time.
The Relinquisher turns his or her credit over to someone else with a shady or non-existent credit history.
That occurs when they co-sign for someone else’s loan or credit card, and the gesture is rewarded by that individual not making the payments. Co-signing is risky to credit scores and to relationships because if the borrower makes late payments, it can tank the co-signer’s credit quickly.
Instead of co-signing, suggest that the borrower try a secured credit card, take out a small loan or get a gas card to help them build or rebuild their credit.