However, there are other things you could do that will trash your credit practically instantly. The problem is that these are actions that can seem to make good sense at the time but can have consequences that are tough to foresee. Here are three of them and what you could do to limit or undue the damage.
Taking money out of your 401(k)
It can be tempting to cash out your 401(k) to pay off your debts or to make a down payment on your first house. But it can be a mistake to even withdraw small amounts, and the younger you are, the worse the damage is. The mistake here is misunderstanding that when you cash out even a portion of your 401(k) this triggers penalties and taxes that can eat up as much as $500 for every $1000 you withdraw. All you have to do is click a button and the money is gone, and with it goes all the tax-deferred gains it could’ve earned going forward..
The downside is any you withdraw from your 401(k) isn’t earning tax-deferred returns any longer. Plus, those returns can’t earn returns any longer. When you the keep money in your 401(k), compounding works miracles. But when you withdraw money, it works against you, and what it costs you only grows worse over time.
So, the way to undo the damage is easy. Never withdraw money from your 401(k) – until you’re ready to retire.
Missing a credit card payment
The problem with credit card payments is that they’re just so darn easy to forget. You’re busy, life is hectic, the credit card statement disappears under the sofa, and so the bill doesn’t get paid. You figure that’s not a problem. You think you’ll catch up next time and all you’ll just get hit with a late fee. Better think again. If there’s a payment where you’re 30 days or more late this could drop your credit score by 100 points or even more. You could go from having good to poor credit, and even end up getting hit with higher interest rates.
In addition, the odds become greater that you’ll be turned down for credit. Recovering from this can take up to three years, and the damage it dues can go well beyond your credit accounts. In fact, an investigation done by Consumer Reports found that people who had “good” credit may be paying hundreds of dollars a year more for their auto insurance than those with “excellent” credit. This means the penalty for having “poor” credit could be $1000 or more.
The way to eliminate the damage from missing a credit card payment is to pay your bill late but before the account is 30 days overdue. This will turn things into a non-event.
Failing to file your income taxes
Owing a great deal of money to the IRS is very bad. It’s even worse if you don’t file a return when you owe money. If you don’t pay your taxes on time, there will be a penalty of 0.5% per month of the unpaid amount. If you fail to file, the penalty is 10 times that or 5% per month. Plus you’ll owe interest on your balance.
How can the IRS tell what you owe if you don’t file a return? It can sort of “Frankenstein monster” one together based on information from financial institutions, other government agencies, and employers. It will then pursue you relentlessly for what it believes you owe. The IRS can put liens on your home, seize your bank accounts, and your wages,, and even file criminal charges against you.
How can you restrict the damage from failing to file a return? File your missing returns and pay whatever portion of the debt you can. Then, work with the IRS to set up an installment plan for the rest.
