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Credit Score Killers

By Blake Ellis | 8/19/2013, 11:50 a.m.
Your credit score can make or break your financial future.
Your credit score can make or break your financial future. (Photo by Dana Lipnickas/CNN).

NEW YORK (CNNMoney) - Your credit score can make or break your financial future.

Not only is it used to determine whether you're creditworthy enough to open a credit card, land a mortgage, rent an apartment or get an auto loan, but it also plays a big factor in the interest rate you qualify for.

There are multiple credit scores out there, but the most common is your FICO score, which ranges from 300 to 850. A score of 780 or above is considered excellent and will land you the top deals available, while a 720 to 780 is strong but may not qualify you for the best rates, says John Ulzheimer, president of consumer education at SmartCredit.com.

A 680 to 720 means you're likely to get approved for credit but not likely to qualify for the most favorable rates, while having a 680 or lower will make it hard to get approved for credit at all, and any credit you do get will come with sky-high interest rates.

To avoid this bottom rung, steer clear of these common credit mistakes:

Carrying big balances

Carrying piles of debt is never a good idea. Keeping a big balance on a credit card can increase your credit utilization ratio, which is the percentage of your credit limit that you use. Together with other measurements of your overall debt, this ratio accounts for about 30% of your credit score.

The ratio is calculated using the end-of-month balance that appears on your bill, meaning that your score can suffer even if you pay off your balance every month. To keep your debt utilization ratio in check, Bill Hardekopf, president of LowCards.com, recommends using less than a third of your credit limit.

Closing credit cards

It may seem like the responsible thing to do, but closing a credit card account can actually hurt your credit.

That's because it lowers the amount of credit you have available to you -- which can then hurt your debt utilization ratio (unless you don't carry any balance on your credit card).

The length of your credit history is also factored into your credit score, so keeping a credit card open also helps with that.

"Keep it open and charge a sandwich once a month just to have activity, and then pay it off each month," said Hardekopf.

But if it's just too tempting to have so many credit cards in your wallet, get rid of the one with the lowest credit limit, Ulzheimer recommends.

Paying late

Your payment history is one of the biggest factors lenders look at and makes up approximately 35% of your FICO score -- so late payments on credit cards, student loans, mortgages or even doctor's bills can all bring down your score if the company reports it to the credit bureaus.

"One or two isn't going to be significant but if it's habitual it's going to hurt you," said Barrington.

Defaulting

The most obvious credit no-no is defaulting on a loan or credit card, which means you fail to pay back the amount owed to a lender. The biggest hits come from declaring bankruptcy or foreclosing on a home, which can easily slice 100 points or more from a credit score.