2 Little-Known Credit Score Killers….to avoid!

Having a high credit score can save you a great deal of money when it comes to interest on things like mortgage loans, auto loans, lines of credit, …and even insurance premiums.

Many consumers are aware of the common factors that drive a credit score, such as;

• Payment History
• Amount of Debt
• Credit Inquiries
• Length of credit history
• Recent delinquencies

However, there are two credit score killers that most consumers are unaware of that should be avoided, if possible;

$5.00 Collection Accounts

We’ve all received medical bills that we thought were covered by our health insurance plan – I’m not paying that bill is the typical response.

As frustrating as the bill may be, if that bill goes to a collection agency it could negatively impact your credit score with a  60 – 100 point drop!

Unfortunately, with collection accounts once the collection hits your report the damage is done. In other words, paying off the collection will not (currently) reverse the drop in your score.  While newer versions of FICO scoring will hopefully correct this issue, it may be months or years before the new scoring model filters down to lenders.

Our advice: If a major purchase where credit matters is in your near future, pay the bill before it goes to a collection agency and fight with the creditor offline.

Paying all Accounts to Zero

Having no debt should be a good thing, …and for the most part it is. However, credit scoring models need data to generate a score.  For consumers that rarely use their credit cards, or for those that avoid credit and close out accounts, having zero credit usage can negatively impact your score.

Our advice: Try to keep at least 3-5 accounts open and active.  For credit cards,  charge minimal amounts and pay the balance off monthly to avoid interest charges.  Make sure you avoid charging more than 25% of the card limit as high debt/limit ratios will definitely drop your score.  And if you find yourself with a card you never use, shred the card but leave it open (assuming there are no fees) as this will add to your trade lines and amount of available credit – a good thing.

While there are many factors that come into play when calculating your credit score, avoiding the two credit score killers here will help save your score from an unnecessary drop.

About the Author

Joseph Farella, industry expert, award winning author, and Executive Vice President for American United Mortgage Corporation, has guided thousands of home buyers and home owners throughout the years.  Mr. Farella is also the keynote speaker for Homeownership Now, New Jersey’s longest running educational event for first-time homebuyers.  Looking for expert advice – Joe is available at 908.322.5423, or by email at joe@americanunited.com.