What Are the Worst Ways to Ruin Your Credit Score?

A credit score is a numerical representation of an individual’s creditworthiness, typically a three-digit number between 300 and 850. This score serves as a tool for lenders, including banks, credit card companies, and mortgage providers, to assess the financial risk associated with extending credit. Lenders use this score to determine eligibility for various financial products, such as loans and credit cards, and to set the interest rates and terms offered. Beyond traditional lending, a credit score can influence other aspects of financial life, including the ability to rent an apartment, set up utility services without a large deposit, and in some cases, even impact job offers or insurance premiums. A higher score generally indicates lower risk, making it easier to secure credit and obtain more favorable terms, which can lead to significant savings over time.

Missing Payments

Payment history is a significant factor in credit scoring, often accounting for a substantial portion of a credit score calculation. Even a single missed payment can severely damage a credit score, particularly if the payment is 30 days or more past due. The immediate impact can be a notable drop in the credit score, with some estimates suggesting a decrease of 90-150 points for a single 30-day late payment, especially for individuals with higher existing scores.

A late payment typically remains on a credit report for up to seven years from the date of the original delinquency. While the impact lessens over time, a pattern of consistently missed payments can lead to cumulative negative effects, signaling to lenders an inability to manage financial obligations. Beyond credit score damage, missed payments can also result in late fees and, in some cases, trigger penalty interest rates on credit accounts.

Maxing Out Credit Cards

Credit utilization, which is the amount of credit being used compared to the total available credit limit, plays a substantial role in credit score calculations. This ratio is often considered the second most impactful factor after payment history. A high credit utilization ratio suggests to lenders a greater reliance on borrowed funds and potentially increased financial risk.

Most financial experts advise keeping credit utilization below 30% of the total available credit to maintain a healthy credit score. Maxing out credit cards, meaning using 90-100% or more of the available credit limit, significantly increases this ratio, which can cause a rapid and notable drop in a credit score. While the negative impact of high utilization can be reversed relatively quickly once balances are paid down, the initial damage is substantial and can limit access to new credit or favorable terms.

Declaring Bankruptcy

Declaring bankruptcy is a legal process designed to relieve overwhelming debt, but it comes with severe and long-lasting consequences for one’s credit score. The immediate impact on a credit score is drastic, often resulting in a drop of hundreds of points, with some individuals experiencing a decrease between 130 and 240 points, especially those with higher scores prior to filing.

Different types of bankruptcy exist, such as Chapter 7 and Chapter 13, and their presence on a credit report varies in duration. A Chapter 7 bankruptcy, which typically involves the liquidation of non-exempt assets to repay debts, can remain on a credit report for up to 10 years from the filing date. A Chapter 13 bankruptcy, which involves a court-approved repayment plan over a period of three to five years, generally stays on a credit report for seven years from the filing date. The long-term presence of a bankruptcy record makes it significantly more challenging to obtain new credit, loans, or even housing during that period, as it serves as a warning sign to potential lenders.