Most consumers believe paying bills on time means you will have a good credit score and under certain conditions that is true. Paying bills on time is 35 percent of your overall credit score but there could be red flags in your credit history that cause denial of credit even when bills are paid on-time.
Bankruptcies, foreclosures, charge-offs and late payments are obvious red flags but other items or behavior may scare lenders too. Even if you are not applying for new credit, your current creditors periodically pull your credit report to monitor how you are paying your bills and for any changes in your credit files.
Here are 5 red flags that can hurt your credit score and cause lenders to ring the alarm bells:
The car, personal, student or any other type of loan you may have co-signed for…Guess what? That is your debt also. You may have been unaware of the fact the entire debt goes on your credit report. Potential creditors and current creditors consider the co-signed debt equally yours and it will be included as existing debt when you apply for any new credit.
Moreover, if the debt goes unpaid, any late or missed payments can be put on your credit as well. If the debt ends up going to a collection agency, you will be pursued for payment. Worse, if lawsuit is filed for collection of the debt, you will be included in the legal action. Co-signing means you are financially responsible for the debt and any potential creditor may be apprehensive in granting credit.
2. Multiple Credit Inquiries
Each time your credit report is pulled, your credit score takes a small hit. How many points taken off your credit score varies but multiple inquiries is a definite red flag. Creditors may view multiple inquiries as a sign of financial difficulty. An important fact to remember is if you are applying for a car, home, refinance or student loan you can minimize the damage by applying within a two-week period.
When you make all of your applications within a two-week period, all the inquiries are treated as one. The exception to this is applying for credit cards so do not go out and apply for multiple credit cards within a two-week period because your score will take a steep dive.
3. Paying only the minimum due on credit cards
Credit bureaus have added a two-year review of the actual amounts paid each month. These figures reveal whether you are a revolver who carries a balance and pays interest charges, or a transactor who makes purchases but generally pays them off before interest charges are triggered. Most lenders view paying only the minimum payment as a sign of financial trouble, some even view it as a soon to come default.
Your current creditors make money when you carry a balance but potential lenders interpret consistent monthly minimum payments as a red flag that you are unable to pay off the balance in full and may default at some future date. More importantly current creditors may review how you are paying other obligations and decide to lower your credit limit which could negatively impact your credit utilization ratio.
4. Multiple New Accounts
With retailers offering instant credit accounts and credit card companies mailing competing offers, it can be tempting to open multiple accounts. Be careful because your current creditors are watching you. Opening multiple accounts in a short period of time may signal to your current creditors that you may be experiencing financial trouble.
Credit card companies engage in account monitoring on a monthly or every other month basis. Creditor card companies and banks consider new credit accounts as money being loaned to you and opening multiple accounts could be an indicator of problems with your finances.
5. Getting a Cash Advance
The interest rate on cash advances is typically much higher than regular credit card charges. A cash advance is simply not something most consumers get just because they want one. A cash advance is viewed as an emergency solution to a financial issue.
Although potential lenders have no way of knowing what you charge on your credit accounts, the credit card company which advanced you the cash may penalize you for getting a cash advance. Your credit line may later be reduced if your credit card company believes you are having financial difficulty.
The main issue with a cash advance is they are immediately added to your debt balance. Once this occurs your available credit is lowered and using more than 30% of your available credit can result in a decrease in your credit scores.
Never missing a payment is great for your credit score but if you find it challenging to get new credit, lenders may be scared off by these red flags.