Updated: 10/13/2011 4:15 PM ET|
9 money goofs that won't hurt much
Worried that a late utility bill will wallop your credit scores? Stop fretting. These common lapses could lead to financial troubles, but they won't ding your scores.
It's hard to overstate how important credit scores have become in our financial lives.
Not only do our scores influence whether we get loans and how much they cost, but the information is also used by insurance companies to set premiums and by landlords to evaluate applicants. Good credit scores can save you money; bad scores can cut you off from financial help or cost you literally hundreds of thousands of dollars over your lifetime.
Given how important credit scores are, you may find some relief in the fact that not every financial misstep you make will necessarily show up in your numbers. In fact, there are plenty of mistakes you can make that won't touch your FICOs, which are the credit scores most lenders use.
Those blunders include:
1. Job hopping
Flitting from post to post may brand you as a flake in many employers' eyes, but multiple job changes don't affect your credit scores.
Your employer may be listed on your credit reports, but the leading FICO credit scoring formula ignores information about employment. Your credit scores are based on how you've handled credit accounts, not how often your business cards change.
A caveat: You may have more trouble getting a mortgage if you haven't been with your current employer for at least two years. That's because mortgage lenders these days look at more than just your credit scores, and they like to see some job stability in their applicants.
2. A high debt-to-income ratio
Your income is not a factor in the FICO formula, so the fact that you have debt payments eating up a big chunk of your paycheck won't, in itself, hurt your scores.
What will damage your digits is maxing out your credit accounts. If your balances eat up a big portion of your credit limits, your scores will suffer.
Also, as noted above, mortgage and other lenders look at more than just your scores when deciding whether to grant you a loan. A high debt-to-income ratio could torpedo your chance of getting a loan or force you to pay a higher interest rate.
Plus, owing a lot is just a drag. You're paying for past consumption, rather than enjoying today or saving for your future. If your debt payments, including your mortgage, total 40% or more of your income, seek help.
3. Paying late on many bills
Lenders -- including credit card, auto and mortgage lenders -- are quick to rat you out to the credit bureaus if you skip a single payment. Even one 30-day late payment can knock more than 100 points off your credit scores.
But most other billers cut you some slack. Utility companies, for example, typically don't report accounts to the credit bureaus until they are seriously overdue and in collections. The same is true for most phone carriers, cable and satellite television providers, and tax authorities. Insurers usually won't take you to collections; they'll just drop your coverage. (There are exceptions, of course; check your credit reports at AnnualCreditReport.com to see if any accounts other than those from lenders are being reported on your files.)
Of course, you shouldn't pay late if you can avoid it, since doing so usually triggers late fees, cranky calls from the companies you owe and, in the case of insurance lapses, trouble with your mortgage lender or your state's vehicle licensing agency, plus exposure to catastrophic bills. But you shouldn't worry that one forgotten water or cell bill will cost you your good credit scores.
4. Having no savings
Living paycheck to paycheck increases your stress levels, but it doesn't, by itself, hurt your credit scores.
Just as the FICO scoring formula ignores income, it also ignores your assets. You could have a million bucks in the bank or have no bank account at all -- the FICO formula doesn't know or care.
In a practical sense, though, having no savings can increase the likelihood you'll hit a bump in your financial road that causes you to miss a credit payment or go deeper into debt -- both of which can hurt your scores. Read "Why you need $500 in the bank" for more on breaking out of the paycheck-to-paycheck grind.
5. Bouncing checks
Overdrafts won't show up on your credit reports or affect your scores unless you fail to make good on your bounced transactions. If you can't cover the debt, though, the bank can turn you over to collections and that can hurt your credit. Plus, you're likely to wind up on one of the blacklists the banking industry uses to keep track of those who've abused their checking accounts. That can make it tough to open another bank account for years to come.
If you're having trouble keeping track of your bank balance, you should:
- Sign up for email or text alerts that will tell you when you're running on fumes.
- Turn off "bounce protection" or "courtesy overdraft." Banks have been pushing this service hard because it rakes in lots of profits.
- Consider true overdraft protection, which links your checking account to a savings account, credit card or line of credit. This is the best choice for occasional overdrafters. If you're chronically running on fumes and in danger of racking up debts you can't pay back, just shut off bounce protection and learn to live with the money you've got.
6. Carrying a small credit card balance
Carrying a balance on your credit cards is financially foolish, but as long as the balance is small, you won't hurt your credit.
But small means small, as in less than 10% of your available credit. Any balance that eats up more of your limit can start to dampen your scores. The bigger the percentage of your limit you're using on any card, the worse the potential impact.
You also should know, though, that carrying a balance doesn't help your credit. Having and using your credit cards lightly are what's important -- you don't need to pay interest to boost your credit scores.
7. Getting a student loan deferral or forbearance
Skipping a payment on a loan is a huge, hairy deal, as I mentioned above. But if you make formal arrangements with a student lender to enter a deferral or forbearance program, your credit shouldn't be affected.
Just make sure you're approved for the program before you stop making payments, since a misunderstanding could cost your credit scores dearly. And use these programs sparingly, since your debt will typically grow when you're not paying it down.
Also, understand that student loan deferral and forbearance programs are unique. Other workout or loan modification programs, such as a mortgage modification, may affect your credit scores.
8. Having a fat wad of credit cards
Keeping track of a bunch of credit card accounts can be a pain, with all the different due dates and potential fees you might have to pay. But rest assured: There's no such thing in the FICO scoring formula as having "too much available credit." Open credit lines generally have a positive impact on your scores, which is why you don't want to close accounts or request lower limits if you're in score-improvement mode.
You don't want to rush out and open a bunch of new cards, though, since each application can ding your scores. But if the accounts are already open, you shouldn't worry that they're dragging down your scores unless (again) you're using too much of your available credit. If you are carrying big balances, spreading the debt over several cards and paying down those balances over time should help your credit; closing accounts will not.
9. Obsessing about your credit scores
You could check your credit reports and buy your credit scores every day for years, and still not impact your FICOs. That's because the FICO scoring formula ignores any inquiries you initiate through official channels such as the credit bureaus, AnnualCreditReport.com or myFICO. Where you can run into problems is in having your credit pulled by a lender or even a friend at the bank, because those typically will be coded as "hard inquiries" that can ding your scores.
Also, checking your credit a lot can cost you a lot. You get only one free peak at your credit reports each year, and you typically can't get your FICOs for free (if you're getting free scores, they're probably not FICOs, or you've signed up for credit monitoring that will cost you a monthly, quarterly or annual fee). Scores at myFICO cost $19.95 a pop, and the credit bureaus charge various fees to view your reports after you've exhausted your annual free peeks.
You're smart to review your credit reports once or twice a year to monitor for identity theft and errors. You also should check FICO scores a few months before you plan to apply for a major loan. Otherwise, though, you should probably relax and find a hobby that doesn't involve obsessing over three-digit numbers.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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