Paying your bills on time isn’t always enough to keep a high rating. Watch out for these hidden pitfalls.
You don’t need to be an MBA to know the best ways to damage your credit rating. It’s actually rather easy: Just fail to pay your bills on time (or, better yet, don’t pay them at all), open a bunch of credit cards at once, and file for bankruptcy.
But there are plenty of other, less obvious ways to ding your credit, some of which might come as a surprise to even the fiscally savvy. In the spirit of “forearmed is forewarned,” here are five such offenses.
Credit Buster #1: Spending Up to Your Limit
Credit bureaus are smart—but even more than that, they’re really good at playing the odds. To calculate your credit score, they look at a number of factors. Second only to your payment history is something called debt utilization ratio, which is the relationship between your available credit and the amount of debt you have. To the banking world, an acceptable debt utilization ratio is around 30 percent, but when the ratio creeps above 50 percent, it sets off red flags, something you do not want to see flapping around on your credit report. Ideally you should stay below 30 percent.
Credit Buster #2: Applying for Too Many Lines of Credit
Every time you apply for a line of credit—whether from a bank or retailer or even for a rental car or cell phone—the lender requests a copy of your report. Each of these “hard pulls” can bring down your score, the rationale being you might be desperate for money or unable to pay the debt you already have.
Credit Buster #3: Paying Your Rent Late
Not all landlords and management companies use fee-based services like RentBureau or ClearNow to check (and report) tenants’ rental history. But some do, and if you have a habit of being tardy with the rent check, your landlord can notify credit bureaus of your payment history—and this blotch stays on your record for seven years. Should your landlord hire a collection agency to recover funds, well, that will really zap your credit. On the bright side, a perfect rent track record can have a positive impact on it.
Credit Buster #4: Ignoring Parking Tickets & Library Fines
Think no one cares about your overdue copy of “The Goldfinch”? Then I’ve got some prime office space in Houston I’d like to sell you. Libraries and motor vehicle departments have a legal right to turn unpaid fines and tickets over to collection agencies, which is a pretty silly way to undo all your upstanding-citizen efforts. Shockingly, unpaid bills that go to collections can cost you up to 125 points on your credit score.
Credit Buster #5: Divorce
“Till death do us part” is null and void the second the ink’s dry on your divorce papers, but shared debt is a gift that keeps on giving.
There are so many ways divorce can negatively impact your credit it deserves a post unto itself. In a nutshell, it’s not always possible or convenient to dissolve shared assets and financial obligations. Unlike the union itself, the mortgage, car payments, credit card debt and the children’s education go on and on.
While ethical—and solvent—parties will continue to honor the judge’s “divorce decree” (which determines who’s responsible for what), that’s not the case with everyone. Should your ex fail to pay the mortgage and your name is on the loan, the bank won’t care what the judge said. Whether the cause is a lack of income, poor money-management skills or outright malice, it still affects you—and your credit rating.
Worst-case scenarios: Should your ex file for bankruptcy, creditors will come after you to collect on balances on joint accounts. Also, it’s frighteningly easy for a bitter ex to use your name, social security number (and forge your signature) to open new credit lines and run up huge debt, which you will be on the hook for. But this is where the “financial” aspect ends and the “legal” begins.