Keeping your credit scores in the best shape possible is, at best, an imperfect science. If you’re a financially responsible individual, you may believe that identity theft is the only scenario in which your credit scores could suffer without your knowledge. You’d be wrong.
As unpleasant as it is to have your identity stolen, federal guidelines make it relatively painless to reverse the damage. The true dangers are the ones that you don’t see coming. The following scenarios are much more common than identity theft and, sadly, much harder to recover from.
The people you are most likely to trust with your money—your family members—are also the ones most likely to pose a threat to your credit rating. If, for example, you share a joint credit account with your spouse, you and your spouse both have the right to spend as much of the existing credit line as you wish.
Regardless of who does the spending, however, both of you are equally on the hook for repayment. If your spouse isn’t as financially conscious as you are, you may find yourself facing a high credit card balance and significantly lower credit scores as a result.
Don’t assume you’re safe just because your spouse is frugal. If you are a parent and have added your child to your credit card account as an authorized user to help him or her build credit, your credit scores may be at risk.
Even if you refuse to give your child a card connected to the account, being an authorized user gives your child the authority to call and request one from your credit card provider. Depending on your credit card company’s notification policies, you may not discover the problem until after your child has maxed out your credit card and caused your credit scores to plummet.
Paying Off Financed Items
Nothing feels quite as good as making that very last house or car payment and knowing that big-ticket item is now really, truly yours. That final payment is a cause for celebration, but it’s also a sign to start monitoring your credit.
The credit scoring formula isn’t as simple as making payments to your existing creditors on time and not incurring too much outstanding debt along the way. Part of building and then maintaining great credit scores is carrying a balanced debt portfolio. If you have installment debts, such as long-term home and vehicle loans, along with revolving debts, such as credit cards, you have a balanced debt portfolio.
As soon as you pay off that installment loan, the monthly updates from your bank to the credit bureaus cease. The balance of both installment and revolving debt on your credit report accounts for approximately 10% of your FICO score. Paying off that debt might feel good, but having at least one active installment loan helps keep your credit scores from gradually dropping after you’ve made that exciting final payment.
If you stop making payments on a debt, most creditors make multiple efforts to collect what you owe before turning the debt over to a collection agency. If you’ve recently spent time in a hospital, however, you may fall victim to a phenomenon known as “quiet” collection.
Hospital billing is complex. Patients often receive a myriad of bills from the hospital itself, the different doctors who treated them, the labs that processed tests, and various other services. Many patients submit these bills to their insurance providers and forget about them. Unfortunately, insurance often doesn’t cover everything.
Rather than inform you of this, the medical facility has the option to simply turn the debt over to collections after 180 days. Unlike creditors that make profits from interest, such as credit card companies, medical facilities have little or no incentive to devote resources to debt collection, particularly when medical collection agencies exist solely to fill this need at a reasonable cost to the provider.
The end result is a very unpleasant surprise for many people who would have gladly paid their bills had they known about them. Even if you pay off the collection account immediately, that does nothing to mitigate the considerable amount of damage a collection account does to your credit rating.
The Bottom Line
Unfortunately, paying your bills on time and limiting the amount of debt you carry isn’t always enough to ensure that your credit scores are as healthy as possible. One of the most valuable ways to prevent credit damage from occurring without your knowledge is to subscribe to a reputable credit monitoring service.
A good credit monitoring service will notify you as soon as any information changes on any of your three credit reports. Good communication with your family members and your creditors can help you avoid most of these scenarios. The sooner you know about credit problems, the faster you can fix them and regain your financial health.