Your credit score take years to build up and only a few small mistakes to destroy. Keeping your credit score high can help you to get better interest rates on loans and mortgages, can help you rent an apartment, and much more. Be careful not to make these 3 easy mistakes that destroy your credit score:
1. Making Late Payments that Show for Years on Their Credit Report
The surest way to kill your credit rating is to not pay your debts on time. All credit reports keep perfect records of every payment that is made on time and every one that is late. A few payments that are on time don’t make up for one that is late. When you sign up for a credit card, loan or line of credit, you promise to make all of your payments on time. So when you are late with a payment, you are not paying as agreed. Technically speaking, making a late payment is violating your contract with your lender. This may sound serious, but that’s the way your credit report sees it. While one late payment won’t really hurt someone with a strong credit history, one or two missed payment can destroy the credit rating of someone with only a little credit history—or someone with only one item on their credit report.
When someone misses a payment, it may be for a good reason: they may have had an emergency, they may have been laid off, or they may be in the hospital. However, the computers that track your payments don’t know this, and they don’t care. They record every missed payment the same way regardless of whether you had a good reason for missing a payment or not. This is one reason why you don’t want to miss any payments. Computers can be ruthless. They remember everything! Fortunately, this is where people come into the picture. A lender may be willing to listen to your story and work with you, but you must have a good, true story.
A banker once told a story about a nurse who approached him for a $25,000 RRSP loan. This would normally be a pretty safe loan. The nurse made good money and she was going to invest the money in a very low risk investment. However, on the nurse’s credit bureau, the banker saw that she had numerous late payments including over 20 late payments on one loan. Even though this looked really bad, the banker was still willing to listen to the woman’s story to see if she had a good enough reason for these late payments (which could be substantiated). Obviously in a situation like this, someone would have to have an extremely good reason—like being in a comma for almost two years—for a bank to even consider overlooking such a poor credit history.
2. Maxed Out Credit Cards
If you run your credit to the limit, it will ruin your credit rating. It is always surprising how many people think they have good credit because they pay all of their bills on time, yet their credit rating is horrible because they have maxed out all of their credit cards. The people who build credit rating systems are smart. They know that having maxed out credit cards means that you are one missed paycheque or emergency away from not being able to pay your debts. Although you may have never missed a payment, if your credit cards are maxed out, you are a huge risk and your credit rating will reflect this. A maxed out credit card is defined as someone routinely using 75% or more of their credit limit. Going over your limit is even worse.
If you go on holidays and max out a credit card but have lots of other things reporting on your credit bureau with low balances, your credit rating will probably be fine. But if all or almost all of your credit cards and lines of credit are near their limits, then your credit rating will look poor if you try to apply for credit. The good news is that as you pay your credit cards down to reasonable levels, your credit score will quickly spring back if everything else on your credit report is fine.
This all holds true too if you max out expense cards, business credit cards in your personal name or the credit card that you like to collect points on.
3. Not Paying Your Debts, Declaring Bankruptcy, or Filing a Consumer Proposal
The worst thing you can possibly do for your credit rating is to not pay your debts. If you don’t pay what you owe now, then who will want to lend you money in the future? When you don’t make payments on your debts, that information is recorded on your credit report for 6 - 7 years. The longer you go without making payments, the worse it looks on your credit report. If you go a long enough time without making your normal payments, a creditor will finally send your debt to a collection agency. This will further impact your credit rating. If this has happened to you, your credit cannot be "fixed," but you can begin the process of re-establishing your credit by doing the right things.
Filing for bankruptcy will also destroy your credit rating. Bankruptcy actually impacts a lot more than just your credit rating. This is why people should not enter into it lightly, but as far as your credit rating goes, it will sink your boat every time. Credit can be re-established after bankruptcy, but it takes time – it’s not as easy as you might have heard. Bankruptcy's little brother, the consumer proposal, also effects credit in pretty much the same way as bankruptcy.
If you have destroyed your credit rating or if you are on this path and you want to re-establish your credit, you need to know all of your options so that you can make the best choices for your situation. Contact a non-profit credit counselling service. They exist to give you honest answers and the information you need.
- How to Check Your Credit
- How Your Credit Score is Calculated
- 5 Steps to Repair & Restore Your Credit