If you’ve recently graduated from college and you’re settling into a new career, you might have big plans for your financial future. You might look forward to building your savings account and buying your own house. Since homeownership is in the plans, it’s important to stay on top of your credit.
Nowadays, a good credit score is just as important as having an adequate income. If you want to build a higher score, you probably know the importance of paying your bills on time every month. But if you don’t understand how credit scoring works, you may not realize how seemingly innocent choices can hurt your credit – and possibly impact whether you’re able to buy a house.
Here’s a look at five ways you’re gambling with your credit score without realizing it.
1. Forgetting about library fines
This might seem hard to believe, but forgetting or ignoring an inexpensive library fine can put you in financial hot water and lower your credit score. This isn’t the case in every city, but some local governments are cracking down and turning past due library fines to collection agencies. And unfortunately, once a collection agency has this information and it’s reported on your credit report, your credit score can drop. Even if you pay the library fine after an agency has your account information, the collection stays on your credit report for up to seven years.
2. Co-signing a loan
If you have good credit, your friend or a sibling may ask you to co-sign a loan. This can seem like an innocent request, but co-signers are more than a silent partner in the deal. You’re just as responsible for the loan. Not only are you responsible if the primary signer defaults, this account also appears on your credit report and counts against your debt-to-income ratio. So, when you’re ready to buy a house of your own, a bank may conclude you can’t afford a specific amount because you have too much existing debt.
3. Debt settlement
If you have too much debt, you might feel a debt settlement is better than a bankruptcy. This is when a creditor agrees to settle a debt for less than you owe. But unfortunately, many creditors report debt settlements to the credit bureaus. And since you didn’t satisfy the terms of the financial agreement, settlements hurt your credit score and jeopardize your chances of getting future loans.
4. Applying for too many credit cards
It’s okay to have multiple credit cards, but when you apply for too many credit cards in a short span of time, you look desperate and many lenders will assume you’re experiencing financial trouble and reject your application for a loan.
Every credit or loan application you submit triggers a new credit inquiry, and each inquiry can reduce your credit score by two to five points. This doesn’t seem like a big deal, but if you apply for 10 new credit cards in a short amount of time, you can take as much as 50 points off your credit score.
You might feel it’s safer not to use a credit card. But if your credit card account is inactive for six to 18 months, your credit card company may automatically close your account. Inactivity in itself doesn’t hurt your score, but a closed credit card might reduce the length of your credit history. Since the length of your credit history makes up 15% of your credit score, closing an older account can shave years off your credit history and lower your score.
Keep your credit card accounts active with small purchases every few months and then pay off the card in full. If you decide to close a credit card, start with your newer accounts.
A good credit score not only helps you qualify for a mortgage once you’re ready, it can help you get a favorable interest rate. Numerous factors play a role in your credit score, and if you know how credit scoring models work, it’ll be easier to make decisions that’ll raise your score.
What are other risky credit score moves? Let us know in the comment box below