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Stop Hurting Your Credit

To stop the vicious cycle of bad credit you first have stop the behaviors that are keeping your score in the toilet. Let's go over some of the most common damaging behaviors:

Maxing out your credit cards

Maxing out a credit card is perceived that you are getting in over your head and that you have to rely on credit to cover your expenses. This immediately puts you in the high risk category and your score will take a hit.

Even if you pay off the maxed out balance at the end of the billing period, you will still hurt your score. Why? Because what's typically reported by your credit card company to the credit bureaus is the balance on your last statement; which is factored into your score. In addition, using 100% of your limit on any credit card puts you at risk of over-limit fees which will also hurt your credit score.

Skipping a payment

Missing just one monthly payment could knock up to 100 points off of your score. The higher your score, the more you stand to lose. If you are in the 700 range, one skipped payment would mean a 90 to 110 point decrease. If you are in the 600 range, expect a 60 to 80 point decrease. It truly does not take much to trash your credit.

It is one thing if you miss a payment because you have hit hard times and can't make all of you monthly obligations. However, if you are tempted to skip a payment so you can use the money for other non-essentials, don't do it. The long-term consequences are not worth it. And, be careful that you don't miss a payment due to neglect. It is always a good idea to set up automatic payments to make sure your bills get paid on time each month. With credit cards, you can set up automatic payments that take the minimum payment out of your checking account each month. If you choose to pay more on the balance, you can always make an additional payment, but the auto pay will ensure you are at least meeting the minimum and will prevent late and missed payments.

Requesting to have your limits lowered

You may feel that it is financially prudent to reduce your access to high credit limits; to prevent incurring high levels of debt. However, once you have accepted the higher limits, you are stuck with them unless you are willing to take a hit. Reduced limits could be detrimental to your credit utilization ratio; the gap between your total debt and your available credit. Reduced limits, whether requested by you or action taken by your creditor, also insinuates that you can't handle your accounts which makes you a greater credit risk.

There are some situations where it is necessary to reduce your limits. For instance, a lender with whom you are applying for a loan may ask you to lower your overall available credit to become less of a risk. In these cases, make sure your balance is below 30% of limit to do the least amount of damage.

Consolidating your accounts

Applying for new credit can ding your scores. But so can transferring balances from a high-limit card to a lower-limit card or transferring all or most of your credit-card balances onto a single card. In general, it's better to have smaller balances on a few cards than one big balance on a single card. Again, you need to consider your credit utilization ratio.

If your top priority right now is to reduce your debt and you are not overly concerned about your scores, then it's a good idea to transfer your balances to a lower interest card so more of your money can be applied to principle rather than interest. You will get penalized for having a higher utilization ratio on that account, but reducing your overall debt will help your credit in the long-run. It will also increase financial stability; a major plus.

Applying for new credit

Applying for new credit is a dichotomy. If you don't have any credit accounts, or maybe only one or two, you have to apply for new credit if you want to raise your scores. It's a good idea to have a mix of different types of loans. Generally speaking, you should have a minimum of two revolving credit accounts and at least one installment credit account. If you already have these accounts open and active, then you need to carefully consider opening new accounts. Each time a creditor pulls your report in relation to a new credit application (hard inquiry); your score will take a hit.

Aren't using credit

Conventional wisdom says in order to get out of debt you have to stop creating it. Conversely, you can't raise your scores if you don't use credit. However, there is a fine line between using credit to your advantage and carrying too much debt - a disadvantage. Credit scoring models try to predict how well you're likely to manage credit in the future by how well you've managed it in the past. Even though going on a cash-only diet is great for helping you live within your means and prevent debt, it won't do anything for your scores - in fact, you'll be punished for it (go figure). If you don't continue to use some type of credit, eventually your credit reports won't even generate credit scores.

Now, there are some major events that will damage your score the most like a short sale, repossession, foreclosure and bankruptcy. However, these are not common to the average consumer. They occur when circumstances have reached beyond the debtors control and require a different set of guidelines which will not be addressed in this article.

Before you can start building credit, you need to stop destroying it. The above guidelines will help you stop the bad credit cycle.