Good credit is a marathon. Bad credit is a sprint.
If you think about it, it makes sense. Credit – and more specifically, your credit score – is a measure of trust. Lenders don’t have the time to get to know you personally. They can’t talk to your mom or your 12th grade physics teacher. They don’t know you, so they need a quick way to determine whether or not they should lend you money.
And that’s where your credit score comes from.
Think about the major purchases you might make and all of the information that’s available to you about that manufacturer or store or product or service. You can review that data – from consumer reports to customer reviews – and then make an informed purchasing decision.
Creditors need that same data. Your credit report is essentially the consumer report on you and your history with borrowed money. Your credit score is a fast, uniform method of aggregating that information into a numeric representation.
If you’ve ever done it yourself, you know that lending money requires trust in the borrower. And you probably also know that trust takes a long time to earn, but it can be broken almost instantaneously.
So that’s what your credit score is trying to communicate to creditors – how much they can trust you with their money. You build that trust – and your score – slowly, by using credit responsibly.
Unfortunately, no matter how well you’ve built that trust, it can be destroyed. Quickly. Here are the fastest ways to bring that trust – and your score – crumbling down around you.
Timing is everything with credit scores.
Have you ever worked somewhere with one of those big signs that says how many days it’s been since the last accident? The message is rarely about how many accidents they’ve had, but more about how far in the past those accidents occurred.
Your credit score views missed payments similarly. A 30 day late two months ago has more impact on your score than a pair of 90 day lates five years ago. Recent negative reporting has a greater impact, because it more accurately reflects your current ability to repay borrowed money.
Again – creditors don’t have the ability to really know you or to accurately account for events that are generally out of character. There may have been a very good reason why you were late, something that is very unlikely to happen again, but creditors don’t usually have the resources to account for that kind of nuance.
If you miss a payment your score will go down in a hurry. The only way to remedy that is by making on-time payments going forward, and letting the number on your __ Days Since a Missed Payment sign get higher and higher.
Closing old accounts
Each new relationship you create with a creditor or lender is built on the back of your previous relationships with creditors. Those creditors are basically your references. even if they don’t exactly write letters of recommendation for you.
When you close old accounts those references disappear. The quantifiable “trust” that is associated with that long relationship is then essentially removed from your score. Any negative reporting associated with that account, however, remains until at least seven years after the negative event occurred. So you lose all of the good, but keep the bad.
If you’re considering closing old accounts with unfavorable terms just keep in mind that unless the rest of your credit history is solid and well-established, your score might take a heavy hit.
Even if you’ve never missed a payment, opening a lot of new accounts
and maxing out the accounts you already have could have a distinctly negative impact on your credit score. Why?
Again, think of yourself as a lender. If your cousin asked you for $100 and you trusted them (and had $100 to spare), you’d probably be okay making that loan. But if your cousin asked you for $100 and you already knew that they owed your brother $500, your father $700, your uncle $1,000, and your grandmother $5,000, you might be less inclined to make that loan.
Your current debt responsibilities play a factor in your ability to get new credit. Lenders want to eventually get their money back, remember. So it shouldn’t be a surprise that taking on more and more debt will eventually cause your score to go down.
To maintain a healthy score avoid maxing out accounts and limit the number of open accounts available to you. If you’re already maxed out, get to work paying down debt.
Assuming that everything’s okay
Because your credit score doesn’t seem to have an impact on your everyday life, it’s easy to assume that everything’s fine. It’s even easier to assume that when you’ve never missed a payment, maxed out an account or done anything else to threaten your score.
But even if you’re doing everything right, your good credit can still be undone overnight. Credit reporting errors are incredibly common and so is identity theft. The worst part is that most consumers won’t become aware of these issues until they’re applying for credit or a loan and find out that their “perfect credit” isn’t so perfect anymore.
Everyone is entitled to a free copy of their credit report every year. Visit AnnualCreditReport.com and make sure you’re checking your report regularly. The sooner you spot errors and illicit activity, the sooner you can start fixing those issues.
Three slightly slower ways to really ruin your credit
Getting to the point where your accounts have gone to collections is not especially fast, but it does result in your credit taking a pretty big hit. On the positive side, at least those accounts might still be paid in full, which could partially salvage the situation.
Settling on your accounts – or paying back a percentage of what is owed rather than the full amount – isn’t fast either, but that also has a significantly negative impact on your credit. In that case, the creditors have been able to recoup some of the debt.
The road that ends at bankruptcy, meanwhile, is usually long and painful. Filing for bankruptcy generally means that all unsecured debt is discharged. Corresponding lenders do not recoup any of the debt.
In all three of these scenarios, something has happened that would cause future lenders to be wary of giving you money. You’ve become less trustworthy. And, as a result, your credit score will be affected.
Knowing how easy it is to see your score slip, it’s important to be proactive. If you see yourself struggling to make on-time payments, overextending yourself or making bad credit decisions, ask yourself what the root problem is and create a plan to meet that challenge head-on.
If you need help identifying those problems, don’t hesitate to speak to a certified credit counselor. There’s never a fee for counseling sessions and the information shared is always confidential.
Do you know what's on your credit report? Do you need help pulling and reading your report? MMI now offers Credit Report Reviews - we can pull a copy of your credit report and review the information with you. The service is free, but only available for a limited time, so visit our Credit Report Review page for more information and give us a call today!