Bad Credit Resource Center

There are a few things that people do without realizing that it will have a negative effect on their credit score.  Follow these tips to avoid the common traps that can drop your credit risk rating:

Tip #1: Beware of debts and credit you don’t use.

It is easy today to apply for a store credit card that you forget all about - but that account will remain on your credit report and affect your credit score as long as it’s open.  Having “emergency” credit lines and credit cards you don’t need makes you seem like a worse credit risk because you run the risk of “overextending” your credit. 

Also, having many accounts you don’t use increases the odds that you will forget about an old account and stop making payments on it.  Keep only your active accounts and make sure that all other inactive accounts are closed.  Having fewer accounts will make it easier for you to keep track of your debts and will increase the chances of you having a good credit score.

However, realize that when you do close an account, the record of the closed account remains on your credit report and can affect your credit score for a while.  In fact, closing unused credit accounts may actually cause your credit score to drop temporarily, as you’ll have higher credit balances spread out over a smaller overall credit account base. 

For example, if your unused accounts amounted to $2000 and you owe $1000 on accounts that you have now (let’s say on two credit cards that total $2000) you have gone from using one fourth of your credit ($1000 owed on a possible $4000 you could have borrowed) to using one half of your credit (you owe $1000 from a possible $2000).  This will actually cause your credit risk rating to drop.  In the long run, not having extra temptation to charge and not having credit you don’t need can benefit you.

Tip #2: Be careful of multiple online loan rate comparisons.

Online loan rate quotes are really easy to get - type in some personal information and you can get a quote on your car loan, personal loan, student loan, or mortgage in seconds.  This is free and convenient, leading many people to compare several companies at once in order to make sure that they get the best deal possible. 

The problem is that since online quotes are a fairly recent happening, credit bureaus count each such quote estimate as an “inquiry.”  This means that if you compare too many companies online by asking for quotes, your credit score will fall due to too many “inquiries.”

This does not mean that you shouldn’t seek online quotes for loans.  In fact, online loan quotes are a great resource that can help you get the very best rates on your next loan.  What this information does mean, however, is that you should research companies and narrow down possible lenders to just a few before making inquiries.  This will help ensure that the number of inquires on your credit report is minimal - and your credit rating will not take a hit.

Tip #3: Be careful of excessive inquiries on your credit report.

Every time that someone looks at your credit report, the inquiry is noted.  If you have a multitude of inquiries on your report, it may appear that you’re shopping for several loans at once - or that you have been rejected by lenders.  Both make you appear a poor credit risk and may affect your credit score.  This means that you should be very careful about who looks at your credit report. If you’re shopping for a loan, shop around within a short time period, since inquiries made within a few days of each other will generally be lumped together and counted as one inquiry.

You can also cut down on the number of inquiries on your account by approaching lenders you have already researched and may be interest in doing business with - by researching first and approaching second you will likely have only a few lenders accessing your credit report at the same time, which can help save your credit score.

The next few posts on this topic will continue with more tips.

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