The 10 Absolute Worst Things You Can Do to Your Credit History

by Dawn Handschuh, Personal Finance Writer   

10 things that are bad for your credit history

So you want to avoid establishing a bad credit history. But do you really know what it takes? Here are 10 personal finance scenarios to avoid like the plague if you want to preserve or improve your credit history information.

  1. Consistently make your bill payments late, or let slip a bill payment just once, for over 90 days. An occasional late bill payment of a few weeks or so, perhaps because you left for vacation and forgot about the bills, isn't the end of the world. Your credit will be hurt, but only for the time the account is still due. But if you make late payments a regular habit, or worse, make even a single late payment of 90 days or more, you're headed for trouble. It's a clear signal to lenders that you're likely to skip payments again. Compounding your troubles, bills that are paid late by three months or more will be considered in "default" and will likely go into collections or be considered a "charge-off" by lenders, which means they've essentially given up on collecting that debt. Serious damage will be done to your credit.
  2. Declare personal bankruptcy. This is a clear admission by you that you can't manage your debts. A bankruptcy remains on your credit history for up to 10 years, and it will continue to drag down your credit score for as long as it remains there.
  3. Allow a bank to foreclose on your home. Foreclosures can lower your credit score by at least 100 or 150 points; a 200-point drop is more likely if you had a very high score to start with. If you include the late mortgage payments, the entire ordeal could lower your score by about 240 points.
  4. Max out your credit cards. Nearly one-third of your credit score is based on the amount of debt you carry — more specifically, your debt-to-income-utilization ratio. If you often "max out," or come close to your credit limit on your credit cards, this will lower your credit score. It's best to minimize your debt-to-available-credit ratio by being qualified for a lot of credit but using little of it.
  5. Lose your vehicle to repossession. As with bankruptcy, foreclosure, or late bill payments, a car repo indicates you have trouble managing your finances. Whether your car repossession was voluntary or not makes no difference in its negative impact on your credit.

    The repossession itself, your outstanding debt, and any possible judgment against you should the proceeds from the lender's sale of the car fail to pay off the owed balance can each blemish your credit history for up to seven years.
  6. Have a court judgment filed against you for unpaid debt. Any court judgment against you for unpaid debt to an individual or business will remain on your credit report for seven years.
  7. Sign up for debt counseling. If you were willing to pay for professional debt counseling, credit-reporting bureaus reason, you must have been in pretty bad financial shape. Be careful before pursuing debt counseling, because it will remain on your credit report for seven years or more.
  8. Use a debt consolidation company. Using a debt consolidation company hurts your credit for many of the same reasons as debt counseling does. Both are clear indications that you're in financial trouble.
  9. Allow state or federal taxes to go unpaid. Unpaid tax liens will tarnish your credit report for up to 15 years, making it impossible for you to purchase a piece of property until you pay the tax lien. (Paid tax liens stay on your report for seven years.) Unpaid property taxes can result in the government seizing and auctioning off your property.
  10. Avoid using or establishing credit at all. Rare is the person who can get through life without using credit cards or loans to finance big purchases. But even if you could, you wouldn't be doing your credit any favors. When you don't demonstrate your ability to use credit wisely and pay it back promptly, you appear to lenders as a blank slate with no track record. Your credit history will reflect your credit-avoidance and result in a lower credit score than your fiscal discipline might otherwise merit.