_This post was written by Credit Sesame.
Your credit score is one of the most important indicators of your financial health. An excellent credit score paves the way to easier approvals for credit products, while a poor score can be a major obstacle to getting a loan. Your score also influences the interest rates you pay on what you borrow.
As the new year gets underway, it’s a good time to review your credit report card and score and think about what you can do to keep it climbing. Part of that means avoiding credit behaviors that could drag your score down. If you want to keep your credit outlook positive in 2017, here are some potential pitfalls to watch for.
1. Rising Interest Rates
Credit card interest rates are generally tied to the Prime Rate, which is essentially the interest rate banks charge each other for short-term loans. Your credit card interest rate will probably rise and fall along with the Prime Rate as it changes, and the Federal Reserve raised its benchmark interest rate Dec. 14 for only the second time in eight years.
The rates you pay don’t factor into your credit score, but definitely affect your ability to pay down debt. If a bigger portion of each payment goes toward interest, you’ll need more time to pay off a debt.
Part of your credit score is based on your credit utilization, which is how much you owe in relation to how much available credit you have. As you pay down your balances, your utilization ratio improves, and your credit score should improve along with it (if all else is equal). Higher interest means a longer time to pay down your debt, and a longer time before you see lower utilization reflected in a higher credit score.
To keep your score on even ground, keep your balance below 30% of your credit limit, on each card and overall.
2. A Pay Cut
If you’re considering a job change in 2017, think twice if the new career comes with a lower salary. While your income isn’t a factor in your credit score, the amount of much money you make (or don’t make) can still have an impact on your credit.
The first way income impacts your credit is that it limits your ability to pay down debt. The less money you have, the less you can pay off during any given month. Lowering your debt can help you raise your credit score, so don’t plan to drag debt around any longer than you have to.
The second consideration is cash flow. You’ll need to rethink your entire budget if your pay goes down. A single late payment on your credit report can lower your score by as much as 100 points.
Income is a factor when it comes time to apply for certain credit products, too. If you want a mortgage, you’ll need to show that your debt payments don’t exceed a certain percentage of your take-home pay. A lower salary with the same debt will negatively affect your debt-to-income ratio.
3. Co-Signing a Loan
Co-signing on a loan for someone can put you behind the eight ball where your credit score is concerned. When you co-sign on a loan or line of credit, you assume full responsibility for the debt in the event the borrower defaults.
Late payments and delinquencies will appear on both the borrower’s and the co-signer’s credit reports. If the borrower makes a late payment or defaults on the loan, your credit score will take a hit. The lender can legally pursue both of you for the outstanding balance. A judgment can remain on your credit report for seven years.
If someone approaches you to co-sign a loan, be aware of the risk and consider helping that person learn how to build his or her own credit instead.
Divorce can wreak havoc on your finances and credit. If you and your former spouse opened joint credit card accounts or you both signed off on a mortgage or car loan, dealing with those debts should be a top priority.
If you have a shared credit card, for example, close the account down immediately. As long as the account remains open, either person can continue to make new purchases. As a joint owner on the account, you are responsible for the charges even if you didn’t make them.
When something bigger is at stake, like a car or a home, you’ve got a couple of options. You could sell the asset and split any proceeds from the sale. The spouse who’s going to keep the asset can refinance the loan in his or her name only.
Creditors have no regard for a divorce decree. Even if a judge declares one spouse responsible for a debt, you can still be sued for it if your name is on the account. If you don’t get your name off a loan and your former partner stops making payments, your credit score will go down the drain just as if it were you who stopped making the payments.
5. Cold Turkey on Credit
By this point you might think that the best way to dodge credit score woes is to avoid credit altogether. While putting your credit cards on ice could keep you from racking up debt, shutting down your credit won’t do much to help your credit score.
Credit scores must be based on credit data. If you don’t have or use credit, there is no data on which to formulate a score. Payment history carries a substantial amount of weight in your credit score, and the past two years are the most important. Once your payment history fades from recent memory, you could lose credit score points.
A smaller part of your score is based on the average age of all of your accounts. When you close an account in good standing it remains on your credit report for another ten years. If you avoid credit long enough, your accounts will age off your report and cease to have any positive effect on your score.
Instead of ditching your credit cards altogether, just cut back on how often you use them. Pick one card and use it to charge only what you can afford to pay in full each month. When the bill comes in, pay it in full and on time. That kind of responsible credit card use can help keep your score moving in the right direction in 2017 and beyond.