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5 BIG CREDIT MISTAKES ...DO THESE AND WILL YOU KILL YOUR CREDIT!

It's surprising how many consumers make the same credit scoring mistakes over and over again. In an effort to educate consumers on credit and credit scoring, we've compiled 5 common credit scoring mistakes into a list that defines each mistake and explains why they are bad and how to avoid them:

Credit Mistake #1: Closing Credit Cards Accounts

This is probably THE biggest credit mistake that consumers make. What you may find surprising is that closing credit card accounts can hurt your credit score almost as badly as missing a payment.

Not only is this the number one on the top five credit scoring mistakes, it's also number one on the list of credit myths.

Ironically, most consumers make this mistake based on poor advice from a mortgage lender as a strategy for improving their credit scores. A word of advice people, when you're dealing with something as sensitive as your credit and credit scores, make sure you do your homework before trusting some of these so called 'industry experts' before following through with their advice.

There are two important reasons why you should not close credit card accounts:

Why would this be a bad thing?

It's simple - you never want to get rid of old, positive information in your credit reports. This information actually helps your credit scores.

Credit scorers want to see this positive account information. They want to see your long, perfect history of making your payments on time because this information significantly helps your credit scores.

This information significantly helps your credit scores so why would you ever want that history to disappear? You wouldn't! Here's an analogy for you: let's say you made straight A's in high school. What if the record of that perfect scholastic accomplishment were permanently deleted seven years after you graduated? Would you ever want that history deleted? Of course you wouldn't. The same is true for the credit reporting environment.

So, what should you do with old credit cards that you don't use any longer?

What you don't want to do is to let the account become inactive. When this happens, the credit card companies aren't generating any revenue for your account.

Eventually they'll close the unused account because you're more of a liability than an asset. You can prevent this from happening by using the card every few months for low dollar purchases like dinner or a tank of gas.

When the bill comes in, just pay it in full. If you do this, it will ensure that the account will never be closed and you'll always get credit for your good payment history.

So how will closing unused credit cards hurt your credit score? When you close an account, the amount of available credit decreases, which could result in a higher revolving utilization and lower your score.

Let's use the example from above and close the second unused credit card account. When you close the account, you remove it from any utilization calculation and now you're stuck with one open credit card account with a $1,000 limit and a $500 balance.

This caused your utilization to go from 25% to 50%.

Remember, you divide the total balance by the total available limit so $500 divided by $1,000 is .50 or 50%. As this percentage increases, your credit score decreases.

When you're talking about several unused credit cards with high limits, you can just imagine what closing credit card accounts could do. I've seen consumers go from a 10% utilization to almost 100% utilization because they closed all of their credit card accounts except the one they were currently using.

Big mistake.

Credit Mistake #2: Missing Payments

It doesn't take a credit scoring expert to tell you that missing payments is a bad thing. The only reason I made missing payments second to Closing Credit Card Accounts is because this one is a no brainer.

It shouldn't take a credit expert to tell you that missing payments is bad. Common sense should tell you that missing payments is bad. Credit scores are designed to predict how likely you are to miss payments in the future.

This means that they look at your credit history to view how you've managed all of your credit obligations.

Missed payments is the most powerful predictor of future late payments. The FICO score evaluates previous late payments in three different layers:

How Severe - How severe is the late payment? It doesn't take a statistician to tell you that a 30-day late isn't as bad as a 90-day late. The more severe the late payment, the more damaging it is going to be to your credit scores.

Consumers who have missed payments by a few weeks and then bring their accounts current score much better than consumers that have gone 90+ days past due. In fact, a 90-day past due is the threshold that will wreak havoc on your scores.

If you are unable to avoid a late payment, the next best option is to get those accounts current as quickly as you can.

How Recent - How long ago did the late payment occur?

If you've read some of my previous articles on credit scoring, you'll know that the last 24 months of your credit history are critical because the FICO score places more emphasis on your recent credit patterns.

This means that a late payment 6 months ago is going to carry much more weight than a late payment from 4 years ago. To recover from late payments it's important that you get current and stay current.

How Frequent - How often have the late payments occurred? Consumers that miss payments frequently are penalized much more severely than those that have missed a payment here or there in their past.

If you have a tendency to make late payments your credit scores will reflect your bad habits. Make your payments on time and you'll never have to worry about losing points in this category.

Credit Mistake #3: Settling Accounts

One of the most common mistakes consumers make is assuming that 'settling' with a lender is a great way to save a little cash.

Unfortunately, they don't realize what that a 'settled' indicator in their credit reports is actually derogatory.

"Settling" is a term used in the consumer credit industry that means accepting less than the amount you owe on an account. For example, if you owe a credit card company $5,000 but you can't pay them the full amount then they will likely make you a deal for less than that full amount. They have "settled" for less than the full amount, which is likely much less than you contractually owe them.

This may seem like a good idea because you save quite a bit of money but as far as the credit scoring models are concerned, this is just as negative as other severe late payments.

The only way to avoid the damage to your credit scores is to arrange a deal with the lender to report the account as 'paid in full' as opposed to 'settled'. If they don't agree then it's in your best interest to figure out how to pay them in full or else be prepared to suffer the damage to your credit for the next 7 years.

It's also important to understand that if the account has already made it to the collection phase, the damage is already severe and settling won't really make a difference. Settling is only an option if the account has not already made it to a severe delinquency state. 

Credit Mistake #4: High Revolving Utilization on Your Credit Cards

Most consumers believe that making your payments on time is all it takes to have good credit and earn great credit scores.

What they don't realize is that almost a third of your score is determined by how much you owe on your credit card accounts. If you have high balances on your credit card accounts, you're credit scores could be severely impacted by your revolving utilization.

In order to score the most possible points in this category, I advise keeping your revolving utilization at 10% or less.

Don't be fooled when you hear some of these celebrity experts telling you that 50%, 30% or even 25% is best.

While 30% is considerably better than 50%, 10% or less is ideal. The lower the utilization percentage, the better your score will be. (*To read more about revolving utilization and how it's calculated, please read the revolving utilization bullet in Mistake #1.)

Credit Mistake #5: Excessively Applying for Credit

Whenever you apply for credit your application gives the lender permission to access your credit reports. When they pull your credit reports, it automatically posts an inquiry in your credit record. This inquiry is a record of who pulled your credit report and the date it occurred. 

Credit scoring models use inquires to determine if and when you shop for credit. Statistics show that consumers who have more inquiries are higher credit risks than those with fewer inquiries.

It is for this reason that the more inquiries you have, the more points you lose in the credit score calculation.

The exact point value of inquiries is a much argued topic and is impossible to give an exact point value because it really depends on all of the other information included in your individual credit file.

The best strategy would be to only apply for credit when you absolutely need to.

This means that you should avoid those in store offers of "10% off" in exchange for applying for a store credit card. This may sound like a great idea but the reality is that while you may save a few bucks on your purchase, those inquiries could end up costing you a lower credit score which could result in higher interest rates on auto or mortgage loans in the future.

There you have it. Now that you know the top 5 credit mistakes, you can avoid making the same mistakes that so many other consumers make.

When you are applying for a mortgage loan good credit is an essential ingredient.  In today's lending marketplace great weight is placed on your FICO credit score and your credit in general.  Gone are the days of loose loan underwriting standards and low credit score qualifying.  As lenders claw their way out from the rubble that is/was the subprime mess there will be a flight to quality.  Lenders will walk away from questionable loans with borrower's with shaky/bad credit.  That is the reality.  Knowing this then, is the key to your success.  Do not take chances with your credit.  Always work to improve your credit.  In order to get the best interest rates and loan programs available shoot for a target of 680 or higher for your mid FICO credit score.

For more information on credit improvement or questions generally related to credit or mortgage loans please contact Terrence Tormey from Benchmark Lending at (732) 993-3639 or by e-mail to ttormey@BenchmarkLendingSolutionsUSA.com and please do not forget to visit www.BenchmarkLendingSolutionsUSA.com to learn more about the loan process and to make application for your mortgage loan.

Special thanks are extended to author Edward Jamison, Esq. for his help and insight in writing this article.

I was recently asked the above question and thought to myself "how many other people are wondering the same thing."  There is a lot of misinformation circulating on this issue and as such the issue needs to be clarified.  So please read my response below and please do not hesitate to contact me with any other questions that you have.

"The credit rating companies, i.e. Equifax, Transunion and Experian have caught on to this trick.  In the past it worked to raise the score for the added party, assuming that the account was in good standing and paid on time.  However, not so much anymore.  Today the credit reporting companies are only evaluating the credit if the person is added on as a co-borrower.  As a co-borrower they are assuming responsibility for the repayment of all balances on the account.  Knowing this, if they are willing to assume such financial liability and if you are comfortable with the possibility that they can charge to that account because they are a "co-borrower" then yes this can raise their FICO credit score, assuming of course that this account is in good standing and paid on time.  If, on the other hand your account is delinquent or has a history of late payments, or other derogatory history this will also be attributed to the other party and lower their FICO credit score.  By the same token, if this person has "bad" credit and you put them on as a co-borrower then your credit card company may penalize you for the other person's bad credit and raise your interest rate.  Take the time to think this through weighing all the positives and negatives to "you" not the other party."

If you have any questions please contact me:

Terrence Tormey, Benchmark Lending - (732) 993-3639

ttormey@BenchmarkLendingSolutionsUSA.com

For More Information On Credit Evaluation in General Please Go To:

www.BenchmarkLendingSolutionsUSA.com, and click on the page links on the Home Page dealing with Credit including the Credit Resources identified therein.

The subject of this Blog arose from a question that a potential homebuyer asked.  Some additional details offered where that they believed that their credit was "bad", i.e. non mortgage late payments and unpaid consumer accounts, and they they wanted to make a downpayment of anywhere from 50-80%.  I thought that their question might approximate the position and concerns of other homebuyers out there and so I'm offering my response to this homebuyer in the hopes of addressing the concerns of other homebuyers.

"Without reviewing your present credit profile it is difficult to give you a definitive answer.  What you assume to be "bad" credit may not in fact be bad or it could be much worse.  At a minimum you need to know your middle FICO credit score.  If it is less than 580 then it is going to be very difficult to qualify for a loan even if you are going to put down a large downpayment.  Your credit profile and FICO credit score are what are going to drive the underwriting decision making for the most part and not the amount of your downpayment.  Necessarily your first place to start is evaluating your credit.  Please note that if you pay off some of your outstanding debt that may be reported on your credit report as being a "charge off" or that has been reduced to a "judgment" then this may in fact lower your credit score.  This issue must really be evaluated by a professional "before" you make application for a mortgage loan.  That said, if you make application for a loan before the credit issues are considered and addressed then you have put the "cart before the horse" possibly to your detriment.  On the issue of your downpayment, by no means should you put down more than 20% of the purchase price.  In the majority of locales within the real estate marketplace home prices are declining - some areas more than others.  By putting more money down as a downpayment you are putting more dollars into what may be a declining asset that you may never see again and which are not providing you with any income.  Your better choice is to put down the least amount of money that you can but in no event more than 20% and to invest the balance of your money in a safe and liquid investment that will pay you a market rate of return, i.e. 6% or higher.  In so doing you will also create liquidity for yourselves and increase your level of safety and security.  By way of example, in today's market if more people had more money in the bank then they could weather the storm in the event of job loss or disability, or an increased mortgage payment, etc., however, if you have less or no money in the bank then you cannot weather the storm and you chance losing your house.  The bottom line here is that you should speak with a mortgage professional that is specialized in "Mortgage Planning."  Not every loan officer that you speak with has this specialized training and knowledge."

For more Information please feel free to contact me.

Terrence Tormey - Office: (732) 993-3639 - ttormey@BenchmarkLendingSolutionsUSA.com

For an Interesting Article on "Mortgage Planning" please go to www.BenchmarkLendingSolutionsUSA.com and click on "Mortgage Planning" on the home page.