Credit scores are compiled by credit rating agencies to give financial institutions, employers and even landlords a snapshot of your financial picture. Since it is too difficult and time consuming to evaluate each individual on a case by case basis to arrive at a fair assessment of their financial responsibility and maturity, credit rating agencies take on this challenge and they have devised a point system to rate people according to their financial history. This point system has become the accepted standard in the industry, so anyone who is trying to get an idea of the state of your finances, whether they are considering granting you additional credit, or assessing your application to rent their property will look at your credit score to help with their decision.
The following factors can all lower your credit score, so if you want to make sure your number stays high or increases, this list is a concise description of the things you should not do.
Consistent Late Payments
Being habitually late with your credit card payments sends red flags to the credit rating agencies because they assume that you are rational and will not want to pay excessively high interest charges. Failure to pay is therefore interpreted as an inability to pay so they minus points.
Missing Payments Completely
Consistent with the explanation above, payments that are missed entirely are deemed as a sign that you may well be in financial difficulty. The credit rating agencies therefore deduct points for missed credit card payments.
Reports of Charged-Off Accounts
When an account is charged-off it is passed on to the collections department and possibly even transferred to a third-party collections agency. This means that the rating agencies are aware that several attempts have been made to extract payment from you and they have all failed resulting in the passing on of your account to step-up the collection attempts. This is one of the worst things that can be on your report and it definitely makes a dent on your credit score.
Applying for Too Many Credit Cards
Several applications for credit are viewed as a signal of desperation. Since using newer credit cards to pay off existing ones is a well-known practice a ramped up attempt to gain access to more credit is taken as a sign that your finances are in distress.
Foreclosing on Your Home
Of course, defaulting on your mortgage and getting to the point of foreclosure is also a sign that you are unable to handle your current debt levels. Foreclosures are recorded on your credit report and will further depress your credit score.
To avoid low credit scores it pays to try to avoid these financial missteps entirely. Monitoring your credit report for inconsistencies and incorrect information is also a great way to stay on top of your financial situation.