1. Your credit score affects more than just what rate or terms you get when you borrow money.
Your credit score affects your car insurance and homeowner’s insurance rates. One key factor in your insurance rates is your credit rating. Better credit scores tend to get you lower rates. Additionally, your credit rating can make or break a job offer. Many employers do a credit check on potential hires and base their decisions partially on the results.
2. If you paid off a judgment or collection item, it is probably still showing as unpaid on your credit report.
This is because once the creditor gets their money, they are finished with their business with you. Creditors are generally not too concerned with updating the appropriate court or county clerk or with making the change on your credit report. After all, this benefits you, not them, and takes up their time and money.
When paying off a debt you should demand proof the debt has been paid – known in the industry as a satisfaction letter. Protect your own credit by filing it with the appropriate county clerk and the major credit bureaus. Keep the satisfaction letter and any related paperwork in a file for at least 10 years. Also, check your own credit at least once a year. The websites for the 3 major credit bureaus are: equifax.com, transunion.com, and experian.com.
3. Co-signing a loan for someone else could hurt your credit, even if they repay the loan in full.
If you are like most people, you know that co-signing makes you responsible for paying off the primary borrower’s debt if he or she does not pay. What you might not be aware of is that the late payments on these co-signed loans end up on your credit report. These lates have the same effect on your score as if you had been late yourself. And, creditors don’t notify the co-signor when payments are late. I personally know of one couple who could not refinance their home at the rate they wanted because their son had multiple lates on the car loan they had co-signed for him. The parents had no idea the loan was late until I showed them their credit report.
If you are asked to co-sign, consider the fact that banks make their profits by loaning money. Lenders may have good reason for charging some borrowers higher rates because, statistically speaking, they pose more risk. It’s absolutely true that people who did not pay their bills on time in the past may have no problem doing so going forward. People can improve their credit. However, consider the possibility that the person may be unable to make all their payments on time. Think about what having bad credit, solely because of another person’s failure to pay on time, might do to you. If you want to help someone out, a cash gift or loan directly from you to them might be a better option in the long run.
4. Having your credit cards charged up can bring down your score.
The credit industry calls this factor in your credit score your “ratio of balances to limits”. It measures the percentage of your credit limits that are currently being used. A low ratio means that you are using a little or none of the credit that you have. A high ratio means you are using a high percentage of the credit you have. (In other words, you are “charged up” a lot or even or “maxed out”.) A low ratio has a positive effect on your credit, and raises 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 amount you are “using”, includes your bill for the month the credit report was pulled, even if you are paying off the balance on that card every month. Your credit score will take into account the balances and limits of all of your accounts.
Your “ratio of balances to limits” can have a major impact on your credit score even if you have never had any late payments or other problems. For example, it is possible for one person may have a score of 620 and another 720, with the only major difference being the amount of unused credit.
The effect of being charged up is critical when you have a recent late payment. One late payment may not affect your score very much if you have a lot of unused credit, but the same late payment could severely drive down your score if you are “maxed out”.
I am not suggesting that the answer for everyone is to raise their credit limits or open more credit accounts, because there are many who have difficulty with the temptation it offers. I am merely describing the effect on the credit score. If anything, this is yet another reason to keep one’s debt to manageable level.