Tuesday, April 24, 2018
Business

The hidden threats to your credit score

Many people know that making late payments, skipping payments or filing for bankruptcy are surefire ways to ruin their credit.

But there are more subtle, often unrecognized, things people do that may damage their credit scores and spook would-be creditors. In turn, that can trigger wide-ranging financial consequences - from paying higher interest rates and insurance premiums, to getting rejected for a loan, to forking over a higher security deposit or even getting turned down for a job.

Among the potential missteps:

Opening too many accounts: It's easy to be enticed by instant in-store credit offers — the ones that promise 10 percent off or more on a purchase just for signing up for a credit card. But potential creditors may view people who open multiple accounts in a short period of time as being in financial trouble.

In addition, opening up all that credit could hurt credit scores, which are affected by the average age of a person's credit accounts. The older the accounts, the better, said John Ulzheimer, credit expert with CreditSesame.com.

"So if you've just added a bunch of accounts, you've made your credit report look younger, maybe a lot younger,'' he said. "It takes time for those accounts to age and the average age of your credit history to grow again."

He has this advice fro those tempted by the in-store discount: "Think about the downside, especially if you want to go out and buy a home or a car. You'll be in a higher interest rate tier."

High credit card debt: Potential creditors don't like to see it when they pull a credit report.

"Many people think that if they make payments on time, they'll have good credit," Ulzheimer said. But that may not be the case. The main problem with credit card debt is it's a high-risk type of debt. It's not secured by an asset like a home or a car. So if you have as little as $10,000 in credit card debt on cards that are maxed out, you'd be surprised how low your credit scores can be, even if you are making payments on time.''

On the other hand, if you can pay the debt down, your scores will improve quickly.

Cash advances, minimum payments: Cash advances or consistently making only minimum credit card payments can signal to a card issuer that the customer is under financial stress and is at higher risk for default.

"Believe it or not, there are certain credit card issuers that will hold certain types of transactions on your credit card against you," Ulzheimer said.

People who have poor credit and take cash advances generally run into the most trouble, he said. "Card issuers are already looking at them as high risk. They are already on a short leash."

The card issuer may react by suspending the card's credit line, canceling the card or closing the account at renewal time. Any of those moves could hurt the cardholder's credit scores.

Co-signing for a loan: Besides being on the hook for the money in the event of a default, co-signers will see their credit scores dip the moment they sign and likely plunge if any payments are late.

The entire debt also goes on co-signers' credit reports, which counts against them if they apply for a mortgage or other form of credit.

"It's almost like an afterthought that some people willingly put their name on a contract and not really think through what they have just done," Ulzheimer said. "When you co-sign for a loan, you might as well be applying for it on your own. The impact is really no different."

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