Tightened lending standards have made it more important than ever for consumers to keep an eye on their credit score.
There are five basic practices consumers should avoid if they want to receive favorable interest rates on mortgage loans, credit cards and more, according to a recent report by CNNMoney.com. The first of these is making late payments. This can trim more than 100 points off of a credit score and remain on a consumer's credit history for seven years.
Consumers should also avoid carrying large balances on their cards. This will weaken their debt utilization ratio and bring them closer to an overdraft. New information available on monthly bills may motivate customers to take action against their debt. Under the Credit Card Accountability, Responsibility and Disclosure Act of 2009, lenders are now required to include a timetable detailing the amount of time it would take a borrower to pay off their debt by making minimum payments.
Opening and closing accounts can also be tricky for consumers. Closing certain accounts can affect a credit score more than others, depending on the remaining credit limit available, while credit checks from new lenders may also trim a few points from a score.
"You can look at it as a long-term strategy and go in with the idea that you might lose a few points now but in the long run you might be better off because you'll have more credit available," Barry Paperno, consumer operations manager at FICO, told the website.
The worst thing a consumer can do to his or her credit score is to default on a loan. This can include a credit card charge-off, a bankruptcy filing or a foreclosure on a property. These may lower a score by more than 200 points, making it very difficult to obtain new credit cards or favorable interest rates on mortgage loans.
Difficult financial conditions have caused many consumers to fall behind on the credit card payments. Monthly filings from Bank of America Corp., Discover Financial Services and American Express Company showed that credit card charge-offs increased during the February collecting period.
Still, all is not lost for those who suffer damage on their credit scores. Sound financial practices, like paying bills on time and keeping credit card debt low, may be able to help the score recover over time. Also, as poor financial habits become older on one's credit history they begin to carry less weight among lenders.