Credit score, also known as FICO score, is a very important number in your financial life. Banks and other financial institutions base their decision of whether to advance your credit cards, auto loans, mortgages, and other credit facilities on your FICO score. Interest rates are also usually tied to your credit score, which means the higher the credit score, the lower the interest rate.
So, what should you do when one fine day you find that your FICO score has taken a dip? Any low score will hurt your prospects of being approved for loans and credit cards. And it can cost you more money in the long run due to the accruing interest rate. This is how you can determine what led to the decrease and how you can increase it:
Check Your Credit Report
The first thing to do is to access your credit report from the three major credit reference agencies which include Experian, Trans Union, and Equifax. In the United States, the credit bureaus let you access your report one time per year free of cost through AnnualCreditReport. com.
Review your reports with a fine-tooth comb and try to find out whether there is something incorrect or whether there are accounts that you are not familiar with. Negative information on your credit report which may include accurate information on your accounts, incorrect balance, or wrong personal information may reduce your credit score. In case you find any problems, you should write to the credit bureau and challenge them immediately. They are expected to investigate within 30 days of filing.
Also, try to find out whether a late payment was reported recently. This means that a single late payment is enough to significantly reduce the score for the consumers. For each of these accounts, make sure that you find out whether there is a delinquency status or accounts that are past due—this is a clear indication that you failed to make the minimum payment. Paying off any past-due accounts can help increase your score, especially if those accounts have been sent to collections.
Review New Credit Applications
You have lately created additional accounts, which is one of the reasons the score dropped. This will lower your score particularly when you create multiple new credit card accounts quickly. This is most likely because lenders would use this as evidence of credit limit overstretch.
Every time you apply for a credit card or a loan, the lender must so review your credit record. We term this a "hard inquiry." Credit score computes using the number of recent searches. Anytime lenders see multiple hard queries in a short period, alarms start to ring.
In recent times, have you opened any new credit accounts or taken any fresh credit? Check your credit records for hard queries from last year. If you find several of them in a few months, this might be the cause of your declining score. Multiple hard inquiries might lower your score unlike soft inquiries, which show on your credit record for just one year.
Analyze Changes in Balances
If you have additional credit cards with bigger credit limits particularly if you have a high credit use rate even if you are timely in your payment, you might also see your score drop. This is so because the score is determined considering one's credit usage rate. Computed as the percentage of revolving credit used out of the overall credit limit available, is the credit use rate. Maintaining a low level of use rate is preferable; ideally, this should be 30 percent or lower.
Say, for instance, that you have three credit cards: Say, for instance, that you have three credit cards:
Credit card 1 has a $5000 credit limit and a $2000 current balance. Credit Card 2 has a $0 credit balance and a $3,000 credit limit. Credit Card 3 has a $400 outstanding debt load and a $2000 credit limit.
Dividing all balances ($2, 000 + $0 + $400 = $2, 400) by the overall credit limit ($5, 000 + $3, 000 + $2, 000 = $10, 000) reveals the credit use ratio.
Here your credit use rate is 24%. The desirable is that this is less than thirty percent. Now, let us imagine, that your Credit Card 1 balance is $3,500; the limitations stay the same. Your usage rate lowers to 35 percent when you enter the $3,500 balance. You do not want to find yourself in a situation where you may lose as much as 20 points.
Your risk may appear to be bigger depending on the larger amount of credit limit you request at once. Ideally, general credit card use should not exceed 30 percent and the limit on particular banking cards should be kept lower. Paying down your balances can help you to improve your score if your balances have lately increased.
Review Credit Used I & II
The last component that contributes about 10 percent of your FICO score is the “credit mix,” or the types of credit you have. FICO prefers to see that the credit user has some variation of the accounts that he or she frequently utilizes. These could be credit cards, retail cards, auto loans, mortgages, student loans, personal loans, etc.
If lack of credit mix is an issue that is dragging down your score, then, opening a new credit product will boost your score. But do not open many new accounts specifically to achieve the right mix. Trying to open new credit accounts is usually going to be much higher than any boost that one gets from a healthier mix of credit.
Be Patient Building Credit
Regardless of what led to the credit score drop, one can make a conscious effort to restore the score by embracing patience and appropriate credit behaviors. It is important to know that one does not wake up one day with good or excellent credit. However, consistently paying bills on time, managing credit card ratios, having credit with a mix of credit types, and minimizing credit checks and new accounts will normally increase your score in the long run.
Don’t forget to monitor your credit reports for mistakes that might be negatively impacting your credit. For any discrepancy on the bureaus, challenge it immediately. This way in the future you can fix it and avoid these drops happening if you are monitoring your FICO score every month. Take note of things such as balances and credit inquiries which might be reducing it as we speak.
The most important thing is to do everything right to be approved for a credit. Through hard work and time, you are assured that your FICO will improve and you will be in that good or excellent category you want. Take your time but do not be stubborn, let your hard work speak for itself.
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