4 Things You Don’t Know About Your Credit That Could Hurt You
1. Your credit score affects more than the rate or terms you get when you borrow money.
Your credit score affects your auto insurance and homeowners insurance rates. A key factor in your insurance rates is your credit rating. Better credit scores tend to get lower rates. Also, your credit score can make or break a job offer. Many employers do credit checks on potential hires and base their decisions partially on the results.
2. If you paid a judgment or collection item, it will likely still show up as delinquent on your credit report.
This is because once the creditor gets your money, they have nothing to do with you. Creditors are generally not overly concerned with updating the proper court or county clerk or making the change on your credit report. After all, this benefits you, not them, and takes time and money.
When paying a debt, you should require proof that the debt has been paid, known in the industry as a letter of satisfaction. Protect your own credit by filing with the appropriate county clerk and major credit bureaus. Keep the satisfaction letter and any related paperwork on file for at least 10 years. Also, check your own credit at least once a year. The websites of the top 3 credit bureaus are: equifax.com, transunion.com, and experian.com.
3. Co-signing a loan for someone else could hurt your credit, even if you pay off the loan in full.
If you’re like most people, you know that co-signing makes you responsible for paying the primary borrower’s debt if he or she defaults. What you may not know is that late payments on these cosigned loans end up on your credit report. These delays have the same effect on your score as if you were late yourself. And, creditors do not notify the co-signer when payments are late. I personally know a couple who couldn’t refinance their house at the rate they wanted because his son had multiple arrears on a car loan that they co-signed for him. The parents had no idea the loan was past due until I showed them their credit report.
If you are asked to be a cosigner, consider the fact that banks make their profits by lending money. Lenders may have good reasons to charge some borrowers higher rates because, statistically speaking, they are more risky. It is absolutely true that people who did not pay their bills on time in the past may not have a problem doing so in the future. People can improve their credit. However, consider the possibility that the person may not be able to make all of their payments on time. Think about what bad credit could do to you, just because someone else didn’t pay on time. If you want to help someone, a cash donation or loan directly from you might be a better option in the long run.
4. Having your credit cards charged can lower your score.
The credit industry calls this factor in your credit score your “balance-to-limit ratio.” It measures the percentage of your credit limits that are currently being used. A low ratio means you are using little or none of the credit you have. A high ratio means that you are using a high percentage of the credit you have. (In other words, you’re heavily “loaded” or even “maxed out.”) A low ratio has a positive effect on your credit and increases your score. A high ratio has a negative effect and lowers your credit score.
So a $500 balance on a card with a $2,000 limit has a positive effect on your credit, but that same $500 balance on a credit card with a $500 limit would have a negative effect on your score! The balance, or the amount you’re “using,” includes your bill for the month the credit report was pulled, even if you’re paying off that card’s balance every month. Your credit score will take into account the balances and limits of all your accounts.
Your “balances to limits ratio” can have a big impact on your credit score, even if you’ve never had late payments or other problems. For example, one person might have a score of 620 and another of 720, with the only significant difference being the amount of unused credit.
The effect of being charged is critical when you have a recent late payment. A late payment may not hurt your score much if you have a lot of unused credit, but the same late payment could severely lower your score if you’re “maxed out.”
I’m not suggesting that the answer for everyone is to increase your credit limits or open more credit accounts, because there are many who struggle with the temptation it offers. I am simply describing the effect on the credit score. If anything, this is yet another reason to keep debt at a manageable level.