3 Surprising Hits To Your Credit Score

It can seem awfully capricious, the way those three-digit credit scores bounce around, and maintaining your good credit might seem like more trouble than it’s worth. The truth is, however, that better credit means you can live in a better house with a cheaper lease agreement or mortgage payments, drive a better car for less, and a number of other quality-of-life differences that make a big impact on your daily life. Here are a few of the most surprising reasons your credit score can drop – and what you can do to avoid them.

1. Transferring Debt Around
If you’re stuck with high-interest debt, it may make sense to transfer that debt to a lower-interest credit card or source of credit (like a home equity loan). But opening new accounts hurts your credit, and consolidating all of your various credit card balances to one single one can hurt as well, because one of the factors used to calculate FICO scores is the ratio of each account’s balance to its limit. You can particularly take a hit if you close the old accounts out entirely, instead of leaving them open.

One factor that credit bureaus use to calculate your score is the average age of your accounts, so new accounts are inherently bad, and older accounts inherently good for your credit. Even if you stop using an old account, leave it open, as it’s helping to push up the average age of your credit accounts.

The most important thing you can do is to pay down your balances, instead of transferring them around.

2. Score Card Brackets
Credit bureaus sort people into brackets, that they call score cards, and then measure you against the other people in your bracket. For example, if you’re in bankruptcy but have been paying down all of your balances, and are therefore among the best performing of the people in bankruptcy, your score may be artificially heightened. Then, when you close out your bankruptcy, your score may drop suddenly, because you’re being compared to “normal” borrowers again. The good news is that this drop is often temporary, and will abate as you continue to pay your bills on time and gradually reduce your credit balances.

Mortgage debts are particularly critical to pay on time. If you’re a tenant on a lease agreement, there’s much less likelihood your landlord will report to the bureaus, but evictions and rent court judgments will appear, and will sort you into lower brackets with penalties, so be sure to pay your lease agreement payments on time as well.

3. Parking & Library Fines
Local governments, desperate to boost revenues through fines instead of taxes, are increasingly hiring private collection agencies to collect fines. And, in addition to the fines themselves, they’re collecting late fees, penalties, etc, which can boost a $25 fine to $250 or more.

Aside from the amount due going up if you don’t pay them, any collection accounts on your credit report will do serious damage to your FICO scores.

Whether you’re a professional real estate investor or a tenant with dreams of one day ditching your lease agreement in favor of buying your own home, your credit score is critical to dropping your interest rate and the required down payment. If you want to make real estate affordable, the first thing to do is improve your credit so you’ll pay the bank less and be able to afford a great home. G. Brian Davis