As lending requirements> tighten even for the most responsible consumers credit scores are becoming increasingly important. In order to get a loan these days, a consumer's score not only needs to be healthy, it needs to be in fighting form.
Today, a FICO credit score of 750 or higher is considered the gold standard among lenders, says Ben Woolsey, director of marketing and consumer research at CreditCards.com, whereas in the past borrowers with scores of 720 or higher could land the best rates. (FICO scores range between 300 and 850.) Banks are only lending to people with stellar credit and I think that will continue for some years, says Linda Sherry, spokeswoman for consumer advocacy group Consumer Action.
Those whose score falls well below this all-important 750 level can expect to hit some hurdles. They may have a harder time getting decent rates on a mortgage or student loan.
The problem is there are all sort of ways your score can get decimated and we re not just talking about an overdue bill. Some strikes come unexpectedly and the damage is done before you know it. To prevent any surprises, here are five not-so-obvious ways your credit score can get tarnished:
For advice on how to improve your credit score, read our story here.
Too many inquiries
Each time a lender looks into your credit history, the credit agencies take note. If too many creditors start dipping into your file within a certain timeframe -- say six months to a year -- it starts to have a negative impact on your credit score, explains Gerri Detweiler, credit advisor for Credit.com.
The problem here is that consumers don t always realize when their credit is checked. If, for example, you shop for a new cellphone plan, the service provider will typically check your credit report and use the information in its decision to sign you up. Most utilities, including cable providers, fall into this category, as do (surprisingly) car-rental agencies. An inquiry shows on your credit report and can degrade your score if you actively sought out the credit relationship; inquiries made unsolicitedly (like when you receive a credit-card offer in the mail) won't hurt your score, says Craig Watts, spokesman for Fair Isaac (FICO)
Similarly, when shopping for a mortgage or auto loan, Sherry advises that consumers apply for loans within a 30-day period. The FICO scoring model recognizes that if you go out to six car dealerships within two or three weeks and they all pull your credit, it s seen as shopping for one car, not six, says Sherry. But if you visit six different dealerships over a span of several months, it might look like you re shopping for six cars. You want to take your time but not too much, she says.
Small, unpaid debts
Believe it or not, that parking ticket you put off paying can come back to haunt you. The same things goes for the movie you returned a week late to Blockbuster and the book you borrowed from the library in 1999. After a certain period of time has passed, some cities will turn a bunch of unpaid debts over to a collection agency. The agency pursues the overdue amounts, and when a collection agency record shows up on your credit report, it will absolutely hammer your credit score, says Watts.
Store credit cards
Landing a 15% discount on that new winter coat -- just for signing up for a Banana Republic store card -- can be really tempting. The problem, though, comes when the collection of cards in your wallet look like the store directory at the mall. All those cards for individual retailers means you have a lot of open lines of credit, which the credit bureaus tend to view as potential trouble, especially when the cards aren't affiliated with a national provider such as MasterCard (MA)
Whether it's to make sure their college-age son or daughter can access emergency funds or pay for a hotel room over spring break, many parents add a child to their credit-card accounts as an "authorized user." This means the principal cardholder (in this case, let's say the mother) allows her son to use the account, but does not hold him responsible for making the payments. For the most part, it's a win-win situation for the son. He not only gets to put pizzas for his friends on the family plastic, he also gets the added benefit of building up his short credit history. But if Mom is late paying the bill even one time, her credit score will drop and so will her son's, says Watts.
Something as innocuous as a middle initial can impact your credit score for the worse. Say you re known as Jenny E. Smith on your credit report. You apply for new credit one day and drop the E, or decide to go with Jennifer instead (or you take your husband s name). The credit bureau will create a separate file for you even though Jenny E. Smith and Jenny Smith both live at the same address, says Watts. To prevent these kinds of errors from spoiling your credit score, notify your creditors and the credit bureaus of any name change, says Watts, and make sure they understand you re the same person