What is the most damaging to a credit score?

Your credit score is a vital component of your financial health. It influences your ability to secure loans, rent an apartment, and even get certain jobs. Maintaining a good credit score is crucial for accessing favorable interest rates and financial opportunities. Understanding what factors negatively impact your credit score is the first step in protecting and improving it.

The Key Factors Influencing Your Credit Score

Credit scoring models like FICO and VantageScore use various factors to determine your creditworthiness. While the exact weighting of each factor may vary slightly between models, the following are the most significant:

• Payment History
• Amounts Owed (Credit Utilization)
• Length of Credit History
• Credit Mix
• New Credit

Let's delve into each of these and identify which one has the most potential to damage your credit score.

Payment History: The Credit Score King (and the Biggest Threat)

Payment history, consistently considered the most important factor, makes up approximately 35% of your FICO score. It reflects your track record of paying bills on time. Therefore, any negative marks in this category can be exceptionally damaging.

Why is Payment History So Important?

Lenders rely on your past behavior to predict your future behavior. A history of consistently paying bills on time demonstrates responsibility and reliability. Conversely, late payments signal a higher risk of default.

The Impact of Late Payments

Late payments can stay on your credit report for up to seven years, significantly impacting your credit score during that period. The severity of the impact depends on several factors, including:

• How Late the Payment Was: A payment that is 30 days late is less damaging than one that is 90 days late.
• Frequency of Late Payments: A single late payment is bad, but multiple late payments are devastating.
• Recentness of the Late Payment: More recent late payments have a greater impact than older ones.

Beyond Just Credit Cards: What Counts as Payment History?

Payment history isn't limited to just credit cards. It includes:

• Credit card payments
• Loan payments (student loans, auto loans, mortgages)
• Utility bills (electricity, gas, water) - often reported after going to collections
• Medical bills - also often reported after going to collections
• Rent payments (if reported to credit bureaus - some services facilitate this)

The Bottom Line on Payment History

Consistently paying all bills on time is the single most important thing you can do to maintain a good credit score. Automate payments, set reminders, and do whatever it takes to avoid late payments. A single missed payment can knock your score down considerably.

Amounts Owed (Credit Utilization): Keeping Balances Low

Amounts owed, or credit utilization, accounts for approximately 30% of your FICO score. This refers to the amount of credit you're using compared to your total available credit. It's often expressed as a percentage. For example, if you have a credit card with a $10,000 limit and a balance of $2,000, your credit utilization is 20%.

Why is Credit Utilization Important?

High credit utilization suggests that you're relying heavily on credit, which can be perceived as risky by lenders. Aim to keep your credit utilization below 30%, and ideally below 10%, for optimal scoring.

The Impact of High Credit Utilization

Even if you pay your bills on time, high credit utilization can negatively impact your credit score. It can signal that you are struggling to manage your finances and are at risk of overextending yourself.

Strategies for Managing Credit Utilization

• Pay Down Balances: The most direct way to lower your credit utilization is to pay down your credit card balances.
• Increase Credit Limits: Requesting a credit limit increase (without spending more) can lower your utilization ratio. Be cautious about this, as it can tempt you to overspend.
• Open a New Credit Card: Opening a new credit card can increase your overall available credit, thus lowering your utilization. However, this can also negatively affect your score due to the hard inquiry (discussed later).

Length of Credit History: Time is on Your Side

The length of your credit history makes up about 15% of your FICO score. This factor considers the age of your oldest credit account, the age of your newest credit account, and the average age of all your credit accounts.

Why is Length of Credit History Important?

A longer credit history provides lenders with more data to assess your creditworthiness. It demonstrates your ability to manage credit responsibly over time.

Building Credit Over Time

There's no quick fix for building a longer credit history. The key is to open credit accounts responsibly and manage them well over time. This includes:

• Opening a secured credit card (if you have limited credit history)
• Becoming an authorized user on someone else's credit card (with their permission and responsible usage)
• Making small purchases on a credit card and paying them off in full each month

Credit Mix: Showing Diverse Credit Management

Credit mix accounts for approximately 10% of your FICO score. It refers to the variety of credit accounts you have, such as credit cards, installment loans (auto loans, student loans), and mortgages.

Why is Credit Mix Important?

A good credit mix demonstrates your ability to manage different types of credit responsibly. However, this is a relatively minor factor compared to payment history and amounts owed. Don't take out loans you don't need just to improve your credit mix.

Achieving a Healthy Credit Mix

A healthy credit mix typically includes a combination of revolving credit (credit cards) and installment credit (loans). If you have both types of credit and manage them responsibly, you're likely already benefiting from this factor.

New Credit: Tread Carefully

New credit accounts for about 10% of your FICO score. This factor considers how recently you've opened new credit accounts and the number of inquiries you've made for credit.

Why is New Credit Important?

Opening too many credit accounts in a short period can lower your credit score. Lenders may view it as a sign that you're desperate for credit or that you're taking on too much debt.

The Impact of Hard Inquiries

Each time you apply for credit (credit card, loan), the lender makes a "hard inquiry" into your credit report. Hard inquiries can slightly lower your credit score, especially if you have multiple inquiries in a short period. Soft inquiries, such as when you check your own credit report or when a lender pre-approves you for a credit card, do not affect your credit score.

Managing New Credit Responsibly

• Avoid opening too many credit accounts at once.
• Space out your credit applications over time.
• Only apply for credit when you truly need it.

Major Credit Score Killers: Beyond the Basics

While the five factors above are the core components of your credit score, certain events can cause significant and rapid damage:

Bankruptcy

Filing for bankruptcy is one of the most damaging events that can happen to your credit score. It can stay on your credit report for up to 10 years and significantly impact your ability to obtain credit in the future. There are different types of bankruptcy (Chapter 7, Chapter 13), each with its own implications and timeline for removal from your credit report.

Collections Accounts

When you fail to pay a debt, the creditor may sell it to a collection agency. Having a collection account on your credit report can severely damage your score. Even if you eventually pay the collection account, it will still remain on your credit report for seven years.

Charge-Offs

A charge-off occurs when a creditor writes off a debt as a loss, usually after several months of non-payment. Charge-offs remain on your credit report for seven years, regardless of whether you eventually pay the debt.

Foreclosure

Foreclosure is the legal process by which a lender takes possession of a property because the borrower has failed to make mortgage payments. Foreclosure is a significant negative mark on your credit report and can remain there for seven years.

Judgments and Liens

A judgment is a court order requiring you to pay a debt. A lien is a legal claim against your property to secure a debt. Both judgments and liens can negatively impact your credit score and remain on your credit report for seven years (in most cases). Although judgments are not as common on credit reports as they once were, understanding the impact remains important.

Recovering from Credit Damage

Even if you've experienced credit damage, it's possible to rebuild your credit. The key is to take proactive steps to improve your financial habits and address the negative marks on your credit report.

Strategies for Credit Repair

• Pay Bills On Time: Prioritize paying all bills on time, every time. This is the foundation of good credit.
• Lower Credit Utilization: Reduce your credit card balances to below 30% of your credit limits.
• Dispute Errors on Your Credit Report: Review your credit reports regularly and dispute any errors or inaccuracies.
• Consider a Secured Credit Card: A secured credit card can help you rebuild credit if you have limited or damaged credit history.
• Be Patient: Credit repair takes time and effort. Don't get discouraged if you don't see results immediately.