Minor Mistakes, Major Credit Consequences
A positive credit score is very important thing to have and is increasingly difficult to maintain. Applying for a mortgage, auto loan, utility service and a new job can be very difficult if your credit is less than perfect. There are many credit faux pas which you must avoid to maintain your score; but, as a credit crazed nation, there are a few major pitfalls that most people never consider.
The information contained in your credit report is used for many financial calculations without any regard to your actual credit score. For instance, if you are applying for a mortgage or auto loan, a lender will not only have a specific minimum credit score requirement, they will also combine your minimum monthly payments as reported by your creditors and compare it to your gross monthly income; that is, your income before tax, medical and life insurance deductions. This calculation, known as a Debt-to-Income (DTI) ratio, is just as important as your credit score.
With great advice buzzing around the Internet it can be very difficult to know exactly how to protect your credit score. Unfortunately there are no set instructions as the dos and don'ts will change depending on your specific credit issues. But, simply making your minimum monthly payments on time is not an ironclad guarantee that your score won't plummet.
Making payments on time is very important and your first defense against a slowly decreasing credit score. If your payment is only one day late or if your payment is made during a grace period, it may have the same effect on your score as if you payment was 30 days late. Since 35% of your credit score is determined by your payment history, a few late payments can drastically reduce your score.
The amount of credit you have available is as equally important. If you maintain high balances on your credit cards, compared to the credit you have available, your score can decrease by as many as ten points each year. Ten points may not sound like a big deal, but over five years, 50 points can be a considerable dent in your credit. If you make major purchases and pay for your morning cup of coffee on the same credit card, you may be at risk for maintaining a higher balance. Opting to pay for small ticket items with cash, or a pre-paid credit card to help you control your spending, can protect you from losing track of your credit limits.Continued on the next page