Remember the good old days, way back in 2006, when the streets were paved with credit gold as far as the eye could see and credit cards rained from the sky? Even the credit-destitute were treated like kings by the credit card companies and courted with lavish offers of unlimited credit.
It's a different world now. Banks still say they want to lend money, but really they'd prefer to buy other banks with government money.
Credit issuers aren't sure they want to lend money to people who need to borrow it, a situation somewhat analogous to the Groucho Marx axiom, "I don't want to belong to any club that will accept me as a member."
And woe betide those who ask for loans with glaring blemishes on their credit reports. An unpaid collection is apt to be regarded like a cockroach in the consommé.
These days, wrecking your ability to get credit is about as easy as blowing over a house of credit cards. Here are seven things to avoid:
1. Closing credit card accounts
A quick way to guarantee that your credit scores plummet faster than Lindsay Lohan's career is to slice away your available credit by closing accounts.You see, credit scores are not built around common sense. Doing away with unused lines of credit would make sense to most human beings, but not so much to a credit-scoring model.
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"Many of the things that can lower your credit score are kind of counterintuitive," says Melinda Opperman, the vice president of community outreach for Springboard, a consumer counseling organization.
When you close an account, it no longer adds to your total amount of available credit.
"There is a big chunk of your credit that is factored on the amount owed -- 30% of your credit score. So one-third of your score measures the amount of debt against the credit limit," Opperman says.
| What affects your credit scores | |
|---|---|
Payment history | 35% |
Amounts owed | 30% |
Length of credit history | 15% |
New credit | 10% |
Types of credit used | 10% |
Source: myFICO.com
Without changing your level of debt, lowering the credit available to you throws the ratio of debt to available credit out of whack.
For consumers with very low balances, closing newer credit accounts, slowly, can make sense, especially if the cards sport high interest rates or charge annual fees. But having too much credit is rarely a problem.
"In years past, there was kind of a myth that said if you have just way too much credit available, you have the risk of being potentially overextended because you could access that much credit right away," Opperman says.
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It's still true that when consumers go to take out a home loan, some mortgage lenders may assess the amount of credit available to them and take that into consideration when evaluating their creditworthiness.
"If someone were planning to purchase a home and it was suggested that they close some accounts, the borrowers would want to do it well before applying for a loan and a few months apart -- and make sure that the accounts that they closed did not have too high of a credit limit," Opperman says. "But in general, having a robust credit file will not be an issue."
Furthermore, only recently opened accounts should be considered for closing. Length of credit history is an important component of credit scores.
John Ulzheimer, the president of consumer education at Credit.com and contributor to CNBC, says the ideal credit customer is one with 20 years or more of credit experience -- and you want that good history on your reports. Closed accounts will drop off your credit reports.
"The sweet spot is someone who has 20, 30 or 40 years of credit experience and many, many accounts to look back on," Ulzheimer says.
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