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Credit scores play a large role in our financial lives. FICO, the nation's leading credit score, is used in 90% of credit decisions. If you have a FICO score above 750, your excellent credit rating will help you get the lowest rates on credit cards, loans and even (in most states) auto insurance premiums.
The price differential can be dramatic. According to market data from MagnifyMoney, people with excellent credit scores can get personal loan rates as low as 4.19%. People with much lower credit scores (below 600) would have to pay rates as high as 36%.
But you need to be careful. You can very quickly lose your excellent credit score if you make one of these four mistakes.
1. Miss A Payment
The single most important part of your credit score is your payment history. Even just one missed payment can have a big impact on your score. If you become 30 days late just once, your score could drop by more than 100 points, according to FICO.
If you are only one or two days late, your delinquency is typically not reported to credit reporting agencies. However, you could still be charged a hefty late payment fee.
My Tip: Set up automatic recurring payments so that you are never late.
2. Max Out Your Credit Cards
Using all of the available credit on a credit card can have a negative impact on your score. Maxing out all of your credit cards can be disastrous. According to data from Experian Decision Analytics, people with the best credit scores only use 5.6% of their available credit. People with the worst scores (below 600) use 77.2% of their available credit.
Using all of your available credit sends big warning signals to potential creditors. First, it shows a lack of self-discipline. Creditors fear that you will use all credit made available to you, regardless of your ability to repay.
More importantly, credit limits are a multiple of your monthly income. By maxing out all of your credit cards, it demonstrates that you have taken out a significant amount of debt relative to your earnings.
My Tip: Keep your credit utilization below 10%.
3. Take Your Time Rate Shopping
FICO encourages rate shopping for mortgages, auto loans and student loans. If you are rate shopping for one of these products, FICO ignores all inquiries made in the 30 days prior to scoring. In addition, FICO will treat all inquiries that fall within a typical shopping period as one inquiry.
A single credit inquiry can take five or ten points off your score. That is not a dramatic impact. And if you are smart and get all of your rate shopping done within 30 days, you will be able to get the best deal without hurting your score. However, if you stretch out your rate shopping over a couple of months, you will end up losing a lot more points, and ultimately money.
My Tip: Get all of your rate shopping done within 30 days.
4. Forget To Pay A Medical Bill
According to the CFPB, roughly 50% of all collection items reported to credit bureaus are related to medical bills. The median balance of a medical collection item is only $207. Even worse, there are no standards for when medical debt can be reported to the bureaus. Doctors or hospitals decide when to turn over accounts to collection agencies. Often the collection item results from sloppy processes from the medical providers or confusing reimbursement rules from insurers, rather than financial difficulty.
Unfortunately, the impact of medical debt can be drastic. Just one medical bill of $100 or more can reduce a score by 100 points. Even worse, the current FICO score does not reward paying off collection items. Once a collection item hits your credit report, it will generally stay there for 7 years.
You need to be incredibly aware of the billing practices of your medical professionals. Make sure you chase the invoices and make the payments on time. Otherwise, your life could get more expensive over the next seven years.
My Tip: Don't wait for the medical bill to arrive in the mail. Follow up with your medical provider and get the bills paid.
