5 credit score killers

By Blake Ellis, staff reporter


NEW YORK (CNNMoney.com) -- As banks shy away from making risky consumer loans, a mediocre credit history just won't cut it anymore. To get the best rates on mortgages, credit cards and auto loans, you need a killer score.

Your FICO score is a numerical measure of your creditworthiness that ranges from 300 to 850. While there are a few different credit scoring systems available, it's the FICO score, created by the Fair Isaac Corporation, that most lenders look at when they check your credit.

When will you be debt free?
Enter credit card information
  CC name Balance
($)
Rate
(%)
Minimum
payment($)
1
2
3
Choose a plan
Minimum payments only
Fixed payments
$ monthly
Debt-free deadline
I want to pay off my credit cards in:
years and months
CDs & Money Market
MMA 0.69%
$10K MMA 0.42%
6 month CD 0.94%
1 yr CD 1.49%
5 yr CD 1.93%

Find personalized rates:
 

Rates provided by Bankrate.com.

Lenders have already raised their standards by about 20 to 40 points this year, according to Barry Paperno, consumer operations manager at FICO. So while a score in the 720 to 740 range would have gotten you the best rates on a mortgage in the past, you now need a score of at least 760 to snag the best loans.

"Requirements are higher than in the past so you're going to have to be more diligent this year," said Paperno.

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.

"This continues to be the number one reason scores are lower," said Paperno. "In addition to being a heavily weighted part of your score, if you're late on a payment, it's going to continue to appear on your credit report for about seven years."

If you've made mistakes in the past, you can't change them, but you can outlive them. The longer it's been since you were late on a payment, the less of an impact it will have on your score, but "your history does follow you," said Paperno.

Since payment history accounts for about 35% of your total score, it's really important to start paying on time.

2. Carrying a big balance

Your debt 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.

"The best thing to do is pay your bills on time and pay as much of the balance as possible to try to keep your debt utilization ratio down and raise your credit score," said Bill Hardekopf of Lowcards.com.

As part of the CARD Act that went into effect last month, credit card issuers must now include a chart with your bills that shows how long it will take to pay off your balance if you only make the minimum payments. The chart will also display how much you need to pay each billing cycle in order to completely pay off your balance in three years.

Hardekopf thinks the new information will be a huge wake-up call for most consumers, and even he was alarmed by the calculations on his own statement.

"It was shocking," he said. "This is going to have a dramatic effect on how much people are paying when they see it in black and white, and will be a positive move for their credit score."

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, said Hardekopf.

For example, if you have two credit cards with a limit of $1,000 each and a $400 balance on one card, closing the other account will immediately double your debt to utilization ratio from 20% to 40%.

But the negative effect varies greatly. Closing one card could have a very small impact if you have lots of other high-limit cards.

You can also counteract some of the impact by opening up a new line of credit. But beware: that can also impact your score.

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."

In order to open a new account, a credit card company will need to check your credit, and a typical "hard" inquiry like this will lower your score by about five points, plus the cost of opening a new line of credit typically ranges from five to 15 points.

But the temporary ding only lasts about six months, so if you're in a stable financial situation, the score reduction could be worth it, said Paperno.

"You can look at it as a long-term strategy and go in with the idea that you might lose a few points now but in the long run you might be better off because you'll have more credit available," he said.

5. Defaulting

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. And given the down economy, more people are damaging their credit scores through foreclosures, credit card charge offs and bankruptcies.

A home foreclosure, for example, might dock about 200 points off your score and a short sale could cost you around 80 to 90 points, said Johnson. Declaring bankruptcy could lower a good score of 750 by up to about 250 points, Johnson said.

While most negative information stays on your report for seven years (bankruptcies can stay on for 10 years), it's never too late to start rebuilding your credit.

"People have been hit hard by the economy and those who had really good scores now have scores in the 500s and want to just give up," Johnson said.

But certain good behaviors like making on-time payments, taking out a small loan and paying it off and keeping a low balance, can get your score back up in the mid-600s or low 700s in a little over 2 years, said Johnson. To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.