When it comes to your personal finances, there are definitely a lot of moving parts you need to keep an eye on. For example, you have your savings, but you also have to ensure your retirement fund is being adequately supplied. One especially important element of this aspect of your life is your credit score. Although it is not a tangible feature like the dollars in your bank account, your credit score will arguably have the biggest impact on your finances.
What Is a Credit Score?
A credit score is just a three-digit representation of how likely you are to get a loan, like a mortgage, or a credit card. It does not just represent whether or not you would be approved, but also the kind of interest rate you could expect.
Credit scores are assessed by collecting a wide range of data. As you’d probably expect, though, a big part of this is how you’ve done with loans and credit in the past. If you don’t have a great track record, you can’t expect your credit score to reflect anything different. That’s why it’s so important that you avoid the following financial mistakes.
Making a Payment
This is probably the most common type of financial mistake people make, but that doesn’t mean it’s any less critical for you to avoid doing so. While making a late payment often isn’t the end of the world (there are exceptions to this), it’s the kind of mistake you should probably be able to steer clear of.
Any time you’re late with a payment, the creditor has the option to report that to one of the credit reporting agencies (CRAs). Doing so would definitely affect your credit score. If you’re lucky, though, the creditor may decide not to or, at least hold off until you’re 60 days delinquent.
While that’s common behavior, it’s definitely not the type of thing you want to depend on. Keep in mind, too, that your creditors will track your tendencies as far as paying them back goes. If you miss paying on time once, they might let it slide, but they’re unlikely to be this forgiving over time.
Only being hit once with this type of violation can have serious effects as well. Depending on your current FICO score, missing by 30 days just once could drop it 60 points. That’s a lot, but that’s also on the low side. Your score could flounder by as much as 110 points because of one missed payment!
It’s really never a good idea to miss a payment. Being just a day late gets reported by FICO as being “30 days late.” Being late by 31 to 60 days is reported as “60 days late”, etc. so there’s very little nuance to save you where your credit score is concerned.
Every credit bureau reports these a bit differently, but again, it’s better to be on time with your payments than risk how your mistake will get tallied.
Co-signing a Loan
If you have a friend or family member who is buying a house or otherwise needs a hefty loan, they may have asked you to be a co-signer if their credit wasn’t satisfactory.
While it’s definitely a nice gesture on your part and may not seem like they’re even asking much, the truth is that co-signing a loan could immediately impact your own credit.
Obviously, if your friend doesn’t make good on paying back the loan, your credit score is going to get hurt just as badly as theirs. That’s the significance of being a co-signer. You’re putting yourself on the line, which reassures the lender that the debt will get paid one way or another.
However, it’s also important to understand that simply co-signing can have a negative impact on your credit.
For example, let’s say you co-signed for your son’s credit card. Now let’s also imagine that your son carries a large balance. This could mean that you get a lower score because of the credit card account’s revolving utilization.
It’s definitely true that being a co-signer could have its benefits. If you sign for a friend’s mortgage, this would add diversity to your credit account, provided your friend makes payments on time.
Still, you’re taking on a lot of risk for very little reward and the downsides could absolutely ruin an otherwise great credit score.
It should probably go without saying that bankruptcy will not do your credit score any favors. After all, as bankruptcy either wipes debt from your record or modifies how you pay it back, it’s understandable that lenders would be cautious about extending a line of credit again.
That being said, bankruptcy isn’t a death sentence on your borrowing days. Depending on the type you file, your credit score could drop by between 160 and 220 points. If you had a good credit score, that would be enough to make it fair or to make a fair credit score poor.
How to Monitor Your Credit Score for Free
While these are major financial mistakes you could make that would affect your score, there are plenty of minor missteps that could cause problems too. This is why it’s a good idea to regularly check up on your credit score.
Fortunately, you can do this free. Some websites to use include:
As you can see, there is no shortage of options. There are many others out there too.
If you’re worried about your score or are actively working to improve it, check in once a month to see if your efforts are landing. Just be sure you stick with the same reporter each time or you’ll likely experience fluctuations that may make it look like you’re not making any progress.
Your credit score is too important to leave to chance or take for granted. This is why it’s vital that you avoid the three financial mistakes we mentioned above. A fourth mistake, though, would be not checking in on your score from time to time just to make sure you’re not suffering from a lower figure than you thought.
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