4 Ways You Can Wind Up With Bad Credit & Not Even Know it

Did you just check your credit scores and find out the numbers are much lower than you expected?

“While you might remember missing a payment or defaulting on a loan, there could be many other reasons your credit score can take a dive while you are unaware,” said Cary Carbonaro, managing director at United Capital Financial Advisers and author of “The Money Queen’s Guide.”

Here are four ways your credit score can be negatively affected without you knowing it.

1. You Only Pay the Minimum Payment

You may think you have good credit because you are paying all your minimum payments on time every month. While making on-time payments is the largest factor in your credit scores — making up roughly 35% of your scores — the second largest factor is your debt usage in comparison to your total credit limit. Many experts advise keeping that percentage below 30% — ideally 10% — to have the best effect on your scores.

“Making minimum payments while continuing to charge or keeping high balances lowers your credit score, even though you are paying on time,” Carbonaro said. “With high balances, the more you can stop swiping the card and pay over the minimum payment while still paying on time, the more your score will steadily improve.”

2. You Forgot an Outstanding Bill That Went Into Collections

Carbonaro says it’s easy to move away and forget about an outstanding bill you owe. One common example of this happening is when college students move out of apartments at the end of the year without paying the final utilities or cable bill balance. These small forgotten bills can end up as a collection account on their credit report and they find out about it years later when they apply for an auto loan.

Once any type of account is sent to collections for non-payment, your credit score may decrease by more than 100 points depending on other aspects of your credit report, according to a recent VantageScore report on how credit behaviors affect your credit score.

Collections are serious business, no matter what the amount and can stay on your credit report for up to seven years even after they’re paid, Carbonaro said. She advised following up with all billers when you move to provide forwarding addresses and pay all final balances so this doesn’t happen to you.

3. You Are the Victim of Financial Infidelity in a Marriage

Never heard of that?

“That’s when there is hidden spending or debt on either side of a marriage, both of which can destroy your credit without you knowing it,” Carbonaro explained. “Many types of negative marks can end up on your credit report if your spouse is using your credit to open accounts or taking out joint credit cards and spending up a storm while you don’t know about it.”

Her best advice for avoiding additional credit problems during a divorce if you don’t trust your spouse financially is to put a credit freeze on your credit with all three bureaus. This way, at least no one can open any new credit accounts in your name during this time. (And, keep in mind, taking out credit in someone’s else name without their involvement — meaning that person has agree to co-sign or otherwise open a joint account — is considered identity theft.)

“While this makes life tough for you, too, the peace of mind that your credit is safe is worth it,” advises Carbonaro.

4. You Never Check Your Credit Reports or Credit Scores

If you are a victim of identity theft or there are errors reported on your credit report, your credit can take a deep dive.

“But, if you never check your credit score and see the dip or check your credit reports and find the errors, you will be oblivious to credit problems that you didn’t even cause,” Carbonaro said.

She says the more proactive you can be about checking your credit scores and credit reports, the easier it is to dispute mistakes and correct them and to catch identity theft if it happens. (You can pull your credit reports for free each year at AnnualCreditReport.com and see two of your credit scores for free, updated every 14 days, on Credit.com.)

Image: Christopher Futcher