7 Mistakes That Can Demolish Your Credit Score

It’s the irony of all ironies: Shortly after writing a story about the risk of paying a department store card late after the holidays, since it’s not in your usual list of bills to pay, I forgot to pay one of mine. To be fair, I did check online for my statement a couple of times, but it wasn’t ready yet. And somehow I missed the mail telling me when it was finally ready. Thankfully, the issuer called before the bill was 30 days late, I paid it immediately (with a late fee, ugh) and narrowly averted a black mark on my credit report.

We all make mistakes. But when it comes to our credit, we need to be especially careful because that one slip-up can damage our credit for years to come. Here are seven mistakes that can put your credit on a downward spiral.

1. You Forget to Make a Payment

Forgot about that bill? Your oversight can cost you a lot more than a late fee, it can also have a significant negative impact on your credit score. It feels very unfair to be saddled with a seven-year black mark on your credit reports for a single mistake, but it happens. (Fortunately, most lenders — though not all — won’t report a late payment until you are 30 days late. So if you remember to pay the bill before the next one is due you might be OK.)

2. A Medical Bill Slips Through the Cracks

Maybe you got a medical bill but thought your insurance was going to take care of it. Or maybe you never did get the bill. Either way, a medical bill that winds up on your credit report can wreak havoc on your score. At one seminar I gave not long ago, a participant told me a medical collection account triggered a drop in her score of more than 100 points! How medical bills impact your credit will change somewhat in the future as the result of changes in newer scoring models, along with an agreement reached by 31 state attorneys general and the credit reporting agencies that will help prevent these accounts from being turned over to collections prematurely. But still, try to be extra vigilant about getting, reviewing, disputing or paying your bills after you receive medical care.

3. You Refuse to Pay a Bill ‘On Principal’

Maybe you felt you were overcharged on a bill. Or you’re ticked off because you don’t feel a dentist/doctor/mechanic or other professional did a good job. Perhaps you had a run in with your landlord. Whatever the reason, you refuse to pay a bill. While it may feel good to stand your ground, if the provider you won’t pay reports to the credit reporting agencies, or turns the bill over to collections, you may not feel the same way when that same item keeps hurting your ability to get credit at a decent rate in the future. (Here’s how to remove collections from your credit reports, though it’s not necessarily easy — or guaranteed.)

Sure, there are times when it makes sense to withhold payment. But there are also times when the better strategy is to just pay the bill to protect your credit rating. If the amount of money involved is large, or you really want to fight it, consider taking the provider to small claims court or filing complaints with the Better Business Bureau, Consumer Financial Protection Bureau, your state attorney general, etc., after the fact. (Of course, at times it will make sense to discuss the appropriate strategy with a consumer law attorney first.)

4. You Get Talked Into Co-Signing

Most people who co-sign do so out of a sense of obligation (think kid’s or grandkid’s student loans) or kindness (think boyfriend’s car loan). And many times it’s not a problem. But we’ve heard so many co-signing horror stories in the Credit.com blog comments that we know things don’t always go as planned. Even if the bills are paid on time, the additional debt may affect the co-signer’s credit scores or debt-to-income ratio, and make it impossible to get a loan themselves. And when the bills aren’t paid, the co-signer is stuck with bad credit and bills to pay.

5. You Max Out a Credit Card

Maxing out a credit card could cost you as many as 45 points (sometimes more), according to FICO, even if the amount you owe is small. It’s not so much the amount that matters, as how close your balance puts you to your credit limit. Your debt usage ratio compares your reported balances to your credit limits, and higher ratios can affect your scores. Fortunately this one’s relatively easy to fix if you can come up with the cash to do so. Just pay down your balance, preferably a few days before the statement closing date, so the reported balance is lower.

6. You Close Out All Your Old Accounts

It’s a common instinct to want to close old accounts you don’t use any more. Though more and more people seem to be aware that doing so may have a negative impact on their scores, I still find that many people are worried these unused accounts could be used by credit crooks, or they just want to “tidy up” their finances. While closing an unused account you really don’t want (or that charges you an annual fee) every once in a while may be fine, resist the urge to close all the ones you don’t use. You’re more likely to see your credit scores go down than up if you do.

7. You Assume Everything’s Fine

This is perhaps one of the biggest mistakes we tend to make with our credit. I’ve been guilty of it, too. Because you pay your bills on time, you assume your credit is fine. In a survey by Credit.com earlier this year, 29% of those who had not checked their credit reports cited that as a reason why. (Or maybe you know it’s not good, and you’d just rather not take a look.) But of those who did review their reports, 21% found a mistake, 9% discovered a late payment they didn’t know about, and one in 10 found a collection account they weren’t aware of.

All of the mistakes we described here can cause a significant drop to your credit scores. It matters because consumers with the best credit scores can save significantly on auto and homeowners insurance, as well as on interest cost for their credit cards, auto loans and mortgages. And the savings can add up quickly. One recent study, for example, found that across the U.S. consumers with fair credit pay a little more than 30% more for homeowners insurance when compared to those with excellent credit, and those with poor credit can pay twice as much! You can use this lifetime cost of debt calculator to see how much you can save by boosting your credit scores.

This last mistake is the easiest to fix. It won’t cost you anything and will take a few minutes of your time. If you haven’t done so already, get your free credit reports from each of the major credit reporting agencies, and then review your free credit score (you can see two of your credit scores for free on Credit.com) on a regular basis so if problems do crop up, you’ll know. And if you’re wondering, “will checking my credit score hurt my credit?” the answer is “no,” as long as you get it yourself and don’t ask a lender to pull it for you.

As for me, I set up auto-pay on most of my accounts, and requested paper bills or set up online alerts for the rest. Hopefully, I’ve learned my lesson and won’t make that mistake twice.