We all know that late payments can sink credit scores. What a lot of people don’t realize, however, is that everyone gets a 30-day grace period before any lender can report delinquency to the credit bureaus. Even if you get hit with a late-payment fee from your credit card issuer, you can still save your score if you pay within this grace period.
What to do: If you missed a payment, don’t panic…but be sure to pay at least the minimum amount due within 30 days of your original due date, preferably giving yourself a cushion of a few days so that you don’t accidentally miss the deadline that would allow a delinquency to be reported.
You know that paying only the minimum owed on a credit card invites hefty interest charges and ever-growing debt. But there’s another big problem with carrying a revolving credit card balance—even one that you periodically pay off.
Lenders and the credit bureaus frown upon too much revolving credit card debt and favor borrowers with low “credit utilization ratios” (the percentage of your available credit that you are currently using). In the past, loan applicants with revolving credit card debt could get big bumps in their credit scores by simply paying what they owed in full just before applying for loans or credit. But now lenders have a new weapon in the form of a 24- to 30-month chronology called “trended data,” which reveals whether applicants have consistently carried revolving debt over the previous two years. Trended data will soon make it impossible to quickly fix the damage that carrying revolving debt does to your credit score.
Fannie Mae, the government-backed mortgage giant, already uses this technique, and an updated scoring system called VantageScore 4.0 gives trending data capabilities to all lenders starting in Fall 2017.
What to do: If at all possible, use credit cards only for purchases you have the cash to cover, and pay in full—or close to it—each month.
If you fall behind on payments, it might be tempting to ignore letters and calls from creditors because eventually they’ll give up. That’s technically true, but it’s not the best outcome you could achieve.
Just because your phone stops ringing, it doesn’t mean that your problems are over. Some lenders will eventually write off some uncollectable debt as a loss, but many times they’ll hand it off to collection agencies or sell it to debt buyers, which are likely to hound you even more ruthlessly. A default looks terrible on your credit report and can crush your credit score for up to seven .
What to do: Don’t hide. Engage your creditors. Explain your situation and ask them to work with you by reducing your minimum payments, lowering interest rates, eliminating penalties and/or extending your grace period. This will preserve your credit score and prevent default, which is all but inevitable if you ignore your creditors.
Credit-scoring systems like to see lots of unutilized credit. But not using a credit card at all, even if you think of it as an “emergency” card, can encourage the card issuer to classify the card as unused. If this happens, the issuer may cancel the card because of inactivity.
When this happens, not only does the borrower lose the ability to use that card’s credit line, but he also forfeits the positive effects of having that available credit. The more unused credit a cardholder has, the lower his credit-utilization ratio is. Scoring systems like to see credit -utilization ratios of no more than 10%.
What to do: For any card that you want to keep so that it counts toward your overall credit limit, use it for a small purchase every few months so it is not canceled. Then pay your bill in full to avoid finance charges. And if you have strong credit, you might ask a credit card issuer to increase the credit limit on your card so that your overall credit total expands and your credit-utilization ratio drops.
Many people think that not paying their taxes and having the government issue a tax lien—which is imposed on a person’s property to secure payment of taxes—won’t affect their credit because the taxes didn’t involve borrowing money. This is wishful thinking.
Not only are tax liens visible to lenders on credit reports, but they also serve as warnings to potential lenders that the IRS has a legal right to the applicant’s property, which makes the applicant a greater credit risk.
Federal debt generally is in a class by itself, including federally guaranteed student loans. Unlike virtually all other debt, unpaid tax liens and defaults on federally guaranteed student loans can stay on your credit report indefinitely instead of just for seven years. Also, almost all debt can be statutorily discharged through bankruptcy—but not tax liens or federal student loans. When the bankruptcy dust settles, they’ll still be there.
What to do: Place federal debt and tax liens at the top of your if-you-can-pay-only-one-debt priority list.