How to Decimate Your Credit Score

It's a little scary how important your credit score is these days. Between all the warnings to check your credit reports regularly and how you can't do this or that without fear of credit score reprisal, it's easy to get discouraged and just say, "Forget credit scores, I'm going to do whatever I want."

[See 50 Ways to Improve Your Finances in 2012.]

While that emotional outburst might feel good, paying higher interest rates on mortgages and car loans won't feel good. But let's say, just for fun, you wanted to absolutely destroy your credit score. The following list will damage good scores more than bad scores, but these things will all hurt (See what is a good credit score?)

Stop paying your bills. This one is in the obvious column, but your credit score is hurt whenever you miss a payment. Some companies will report a miss after 30 days while others won't report it to the bureaus until it has been 60 days or longer. It doesn't matter if you miss a payment because you don't have the money or if you simply forgot--companies don't care. They just care that you missed it, and that will certainly hobble your score significantly. Remember, your credit score is a measure of your default risk, or the likelihood that you'll default on your loans, and missing a payment is a key indicator that you're likely to default.

Eventually, when you do default, collection companies will be notified and it will get reported. A collections notice is one of the most damaging records you can have on your report, right up there with bankruptcy. This pretty much knocks your credit score out for several years.

[See 3 Ways Your Credit Score Affects Your Retirement.]

Apply for everything. The marketing department for credit card companies are full of clever marketing folks who aim to entice you to apply for and use their card. They'll come out with fantastic promotions like free money or miles when you spend a few hundred or a few thousand dollars. They know that once they get a "share of wallet," a place in your credit card rotation, they'll earn plenty off transaction fees they charge merchants. There are plenty of promotion-bonus chasers out there who happily apply for every new credit card offer as if there was no penalty.

Unfortunately, there is a penalty. Every time you apply for a credit card, the company checks your credit. That will appear as a hard credit check on your credit report and your score will go down. Unlike inquiries you make yourself, known as soft credit checks and are harmless, the hard ones hurt. After a few months, the decrease will have subsided, but applying for cards on a regular basis, especially right before a large loan application such as a mortgage, can hurt you in the long run.

Max out available credit. Credit utilization, the percentage of available credit you're currently using, is a big factor in calculating your credit score. Since your credit score is a measure of default risk, the ideal credit utilization is not known, but many people believe the ideal figure is in the high single digits. Ultimately, this isn't something you can game to improve your score, but I'm certain it doesn't help if you have a very high utilization ratio. What's high? 50 percent is probably high, but still within reason. If you really want to kill your score, get it as close to 100 percent as you can.

[See Should You Pay Off Debt or Save for Retirement?]

You can do this by either by using a lot of your debt or canceling and reducing lines of credit so your total credit limit is smaller. Remember, the ratio is total debt used divided by total debt available. You can either increase the numerator (debt used) or decrease the denominator (debt available) to increase the ratio.

While I wrote most of this tongue-in-cheek, I don't think you should do any of these things (in fact, I want you to avoid them all). It's important to understand what can destroy your credit score.

Jim Wang writes about personal finance at Bargaineering.com. When he's not tackling money issues, he's usually looking forward to his next vacation and writing about it at Wanderlust Journey.



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