5 Hidden Credit Score Destroyers

Your credit score is one of the most important financial tools in your arsenal. It can determine your mortgage interest rate, your insurance rates, and even whether or not you get a job. Most consumers know that paying bills late, having too much debt, and declaring bankruptcy are all events that can negatively affect their credit scores. However, there are several sneakier credit score destroyers that you might not be aware of.

1. A Reduction in Available Credit

A common occurrence since the 2009 recession is credit card companies lowering borrowers’ credit limits. If this happens to you, you will receive notification of the change in the mail, but you may not be that concerned about it if you are not close to your borrowing limit. Around 30 percent of your credit score, though, consists of your credit utilization; in other words, how much credit are you using versus what is available to you. As your balances rise in comparison with your limits, your score will decrease. For example, if your credit card limit is $7,000 and your balance is $1,500, you are utilizing around 21 percent. If your card company drops your limit to $3,000, you are now utilizing 50 percent, and your score will drop accordingly.

2. Reactivating an Old Collection

Paying off old debts is usually a good thing, but it may have a negative impact on your credit score. If an old debt appears on your credit report as charged off — meaning the creditor no longer expects to be paid — or if it’s over seven years old and does not appear on your credit report at all, even contacting the creditor or collection agency can reactivate the debt and land it right back on your list of new delinquent debts. Newer delinquencies have more negative impact on your credit score than older ones, and this can be as damaging as a new collection report. Each state has its own laws about when debt becomes statute-barred, meaning the collector can no longer legally pursue it. If your old debt is not statute-barred, consult an experienced debt counselor before making contact with the company.

3. Continual Debt Shopping

Finding the best interest rates and debt terms is important to your overall financial health, but this can also drop your credit score if you do it too often. FICO, the major credit score generator, has changed the way it calculates the impact of the credit inquiries that result from debt shopping. It considers multiple inquiries from mortgages, auto loans, and other fixed-term loans as one inquiry if they occur in a short period of time, and it completely ignores these types of inquiries generated in the 30-day period leading up to the scoring date. That reflects the reality that exploring multiple lenders to get the best loan terms is a responsible consumer behavior. On the other hand, FICO treats multiple credit card inquiries as higher risk behavior, and these can have a negative impact on your credit score.

4. A Short Sale on Your House

A short sale occurs when you sell your house for less than the amount owing on your mortgage. These types of sales have become more common since the real estate crash in 2008, as borrowers struggle through the resulting economic downturn. A short sale has to be approved by the lender ahead of time. It can either result in the lender forgiving the rest of the debt or pursuing you for the deficiency. States have varying laws regarding the recourse the lender has to the borrower. Either way, it will impact your credit score. Any prior mortgage defaults will remain on your credit report for seven years. Forgiven debt will be report and will have an impact similar to a written-off collection. If you still owe the deficiency, the lender will register it on your credit report as new unsecured debt. While a short sale damages your credit score significantly less than a foreclosure, it can drop it by 75-100 points.

5. IRS Debt

The IRS has many ways at their disposal to collect any back taxes you may owe them. Although they do not report tax debt directly to the credit reporting agencies, they can file a lien against your house or other property and that does show up on your report. A lien will show up as a collection action and will drop your credit score significantly until it is released. If the lien remains unpaid, it will stay on your credit report for 15 years, longer than any other type of item. Paid liens will remain on your report for seven years.

Many components of your credit score can easily go unnoticed, but staying on top of your financial transactions and monitoring your score on a regular basis are the best ways to keep it healthy. Be aware of downward changes to your credit score, and actively work to increase it. Both time and better future financial management heal all credit scores.

Sam Jones, the author, has been looking at advice on how to improve his credit score on uSwitch.com and thinks that a bit of work shouldn’t make it too hard to improve a credit score if you can manage to get to a stable position.

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