August 10th, 2011

4 Steps to Avoiding Your Own Credit Downgrade

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We discussed earlier what you should do with your money in light of the country’s credit downgrade, but what can the country’s credit troubles teach us about our own finances?

Just like the national debt gets a credit rating, your credit score, given by each of the three consumer credit bureaus (Equifax, Experian and TransUnion), is your personal rating of creditworthiness. Here are a few important precautions to take to be sure your personal credit rating isn’t downgraded.

Don’t get in over your head when it comes to debt.

There are two big options for a debt crisis as big as the one the U.S. is experiencing right now: cut programs and spending, or increase taxes. Both have different ramifications and would affect citizens on an individual level, and politicians can’t decide which route to take.

But when it comes to your own personal finances, the choice is clear: avoid getting into more debt. According to our Credit Simulator, if you have a fair credit rating of 642, you stand to lose over 10 points just by increasing one credit card balance by $5,000.

If you’re already knee-deep in debt, adding more will only drop your credit score and leave you struggling to find a way to pay it back. Avoid getting into more debt by setting your own debt limit. Put a cap on unnecessary spending until you’ve made a significant dent in your current debt repayment.

Prioritize your payments first and foremost.

Right now, the national debt stands at about $14.5 trillion– that’s over $130,000 per taxpayer. And it’s increasing all the time. The scary part is that we’re not able the pay back our debt fast enough, and it’s part of the reason why the U.S. has been downgraded by S&P.

In your own credit life, making a late payment on any of your debts will quickly damage your credit rating, especially if your late-payment habit continues. With a fair credit and a 642 credit score, you’ll lose 45 points if just one debt account goes into collections. You’ll lose that “fair” credit rating and be bumped into “poor” standing, causing a lender to doubt your creditworthiness.

So how do you avoid this fate? Prioritize your debt repayments. Focus on using your credit card like a debit card, ensuring that you have enough cash to cover each charge you make. Having the cash at hand means you’ll be able to pay off your balances in full each month.

Know what you can afford.

For the month of July, the U.S. government had a budget deficit of $129.4 billion. While that is down from $165 billion in July 2010, according to Bloomberg,our country is still spending more than we’re making. What’s more, Washington continues to waver over how to cut expenses.

In your own personal finance, common sense says that spending more than you make is a poor move. The last thing you should do when already in debt is to continue to live beyond your means. With a fair credit rating, adding a new auto loan of $15,000 will cause about a sixty-point drop, leaving you with poor credit.

You may believe you need that car now, but saving up cash for big purchases (or down payments) is a wiser move. Although gratification will be delayed, your credit will thank you in the long run.

Avoid applying for lots of credit at once.

The U.S. economy may face tough times as it’s seeking new investors for the national debt. Similarly, if your own credit rating is less-than-excellent, you may be tempted to apply for lots of credit to try and get approval.

Not only does applying for lots of credit at once make you seem less creditworthy to creditors, but your credit score will take a hit from all of the hard credit inquiries. Each credit inquiry will drop your score several points, and remain on your credit report for up to two years.

Instead, be mindful of what you’re applying for. Use our “Approval Odds” feature to see which credit card you’re more likely to be approved for before you fill out any applications and read the fine print of the credit cards you’re interested in.

Bottom Line: Mimicking the nation’s credit moves in your own credit life could be devastating. Learn from the country’s mistakes by taking these precautions in your own personal finance.

Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.


  1. These are great tips. I especially like number 3. It’s important to know your monthly income AFTER your monthly bills are accounted for, like rent, car payment, insurance, etc. That is the real money you should be focusing on because most of your money is already spoken for before you have it! Don’t glamorize how much money you have, be realistic.

    CreditShout at 12:59 pm on August 16, 2011

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