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Protecting your credit rating isn’t easy. Credit cards, auto loans, home equity loans and our suspect health insurance system can ruin your credit score. From easiest to hardest, here are the dangers you need to look out for:

1. Credit card closure:

Many people close credit card accounts as soon as they pay them off, making this the easiest and most common way that credit ratings are damaged. In fact, I’ve seen credit scores drop one-hundred points in as little as two months because a misguided consumer closed a couple of credit card accounts. Closing an account hurts your rating because it decreases your “percentage of credit available.” Credit scores are based on many factors, but this percentage is one of the most important. The more available (or open) credit you have, the higher your credit score will be. Unless your credit card has an annual fee, NEVER cancel it. In fact, make sure you use it at least once a year to maintain your account — just don’t buy anything that you can’t pay off as soon as the bill comes.

2. Maxed out spending

Banks like to see credit cards with high limits and minimal balances. These “open” cards are a sign of a financially responsible borrower they’re likely to get their money back from. A maxed-out card, on the other hand, creates doubt about whether the card holder can afford their purchases, and leads to lowered credit scores. Applying for new credit cards and requesting higher limits on existing cards can help to fix this problem.

3. Medical Collections:

Health insurance is not exactly known for its reliability - it’s not uncommon for patients to receive a bill for something they think their health insurance covers, then discover their insurance company won’t pay it. By then, the doctor’s office has turned the debt over to collection, and your credit score has taken the damage. Protect yourself against this by checking every bill with both your doctor and insurance company to make sure it’s paid. That extra bit of time you put in could save your credit score 50 points.

4. Co-signing:

We’ve all been asked to co-sign a loan by a friend or relative, and while this can be a great way to help someone close to you, it can also result in your credit being ruined. It’s very important that you consider the following before co-signing — YOU are responsible for whatever happens. That means if the person you co-signed for doesn’t make the payments, you’re expected to. If they file for bankruptcy and include your co-signed loan, the bankruptcy will show on your credit report (even though you haven’t filed). Finally, even if you have PROOF that the other person is responsible (i.e. a divorce decree, a statement from that person, etc.) your credit will still be affected by anything they do (or don’t do). My advice — don’t co-sign for anyone unless you can afford to make the payment yourself.

5. Late payments:

Can’t remember to pay your bills? It could be the only thing keeping you from perfect credit! There are tons of people out there who do everything else right, but have poor credit simply because they pay their bills late. To make sure your bills are paid on time, every time, visit your bank and ask about an automatic bill payment program. Once you enrol in this, your bank will automatically send a payment to your creditor each month from your account. This will improve your credit by making sure you’re never late with a payment again, and can save you money by preventing late fees!

Last 5 posts by Jason Lancaster

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Tags: Finance