Your credit score is one of the most crucial aspects whereby lenders, landlords, insurance service providers and others rely on in evaluating the likelihood of repayment or default. An excellent credit rating means that you get lower interest rates, rental units, insurance rates, and many other things. On the flip side, a low credit score has the potential to harm many facets of your financial life.
As much as there are things that could lead to an improved credit score, there are things that could lead to a worse credit score. This is the best way of protecting your credit since knowing the risk factors will help in avoiding them. Below are some of the reasons that may make you lose some points on your credit score.
Missed or Late Payments Payment history which includes missed or delayed payments is one of the biggest credit score killers. Your payment history contributes to determining your credit score, and it accounts for a large percentage. Each delayed payment can stay on your credit report for up to seven years of time. It’s bad enough that one missed payment can lower your credit score by as much as 110 points. This means that one can avoid late payments or even missed payments by installing automatic payments or reminders.
High Credit Utilization Ratio Your credit utilization ratio calculates how much of the credit that is revolving that you are utilizing in contrast to the amount that is available. It contributes approximately one-third of your credit score determination. In general, it is advisable to maintain your credit utilization below 30 percent on all your credit cards. A credit score can even drop by up to 10 points per card when you max out your credit cards or have unpaid card balances near the credit limits.
Too Many Credit Inquiries Each time you seek credit, the credit provider is likely to pull your credit report. This results to a hard credit inquiry which may reduce your score by up to 5 points or more. This damage can be minimized by not applying for credit too often or applying for credit only when one feels the need for it. Frequent inquiries within a short space of time are likely to be viewed by lenders as indicating a higher risk.
Closing Old Credit Accounts You would expect that paying off credit card accounts that are no longer in use will improve on your score, but it may do the opposite. Credit history duration contributes about 15 percent of your overall credit score computation. Reducing your credit history shortens it and shutting your oldest accounts risks lowering your score. In most cases, it is more advisable to retain the card accounts even if they are no longer being utilized.
First-Time Loan Denials When you apply for a credit card or a loan and you are rejected, then this is negative on your credit score. High numbers of recent inquiries, new accounts, or other risky factors lead to credit checks that end in denial. The hard inquiries from the attempted applications can join the denial itself to form a double whammy to your credit. Every strike reduces your score by a little margin.
Some might wonder whether opening lots of new credit at once is a good idea. This means that it becomes so easy to open all the nice and attractive credit card and loan offers that arrive in your mailbox. However, if multiple new accounts are opened within a short period, it can be perceived as excessive risk by the credit bureaus. Avoid credit seeking by spacing out your credit applications by a period of six months plus whenever possible. One thing that can take 10s of points off your score is if you open too many new accounts in a short space of time.
Sudden Balance Spikes Having high balance on credit cards and having large outstanding balances on loans for a longer period increases credit utilization ratios. However, things such as suddenly maxing out credit cards or making balances that were previously non-existent into large ones will rouse a credit bureau. It connotes risk in as much as it conveys the propensity to spend more than one earns or the credit amount allowed. This is because your score can cut by up to 10-30 points as a result.
Seeking Credit Only to Be Rejected Whenever you apply for a new credit card or loan, the credit provider performs a hard credit check to access your report and score. Many inquiries within a short period could be perceived as suspicious and would reduce your rating. Conversely, credit checks that lead to an immediate rejection also have a negative effect on the credit score. The denial signals the existence of existing or potential problems to future creditors. Each application and rejection decreases your score a little bit and the effect lasts up to a year.
Having High Credit Card Balance and/or Large Outstanding Loan Balance Credit utilization is also calculated as part of your credit score where your current balances on all credit cards and other revolving credit accounts are considered. Spending over 30 percent of the balance indicates that the borrower is a high risk to the potential lenders. Nonetheless, having balances go over 75 percent or even more of your credit limit is likely to harm your score despite making timely payments. This means that high utilization ratios compared to the limit translate into high risk regardless of one’s payment history. Therefore, maintaining balances that are close to one’s credit limit, and keeping credit utilization rates consistently high can gradually chip away at your credit score.
Collection Issues Owing to Relocation Moving to a new home is always followed by the upset of daily home management schedules. One has to ensure that each creditor is informed of the change of address as well as all banks. Regrettably, people often neglect it. Thus, they fail to meet important credit card, loan, and other account payment obligations timely. There are cases where creditors and lenders report all missed payments to credit bureaus even if you never received the bills. Thus, even if you are punctual with payments for the majority of time, a few missed payments due to moving can reduce your credit score by hundred points or even more.
Having Your Credit Limit Reduced or Credit Card Being Shutdown In your reasoning about credit score, you might be convinced that it is beneficial to close all the credit card accounts or some of the credit card companies have limited your available credit. But credit bureaus regard this activity as the raising of credit utilization ratio, which is not true. This implies a higher probability of overspending in relation to your total credit volume or track record. While credit limit reductions or account closure trigger adverse action notations, they only do so if you have not asked them to do so. Thus, when cardholders experience involuntary card cancellation or lower credit maximums, their credit rating is pulled down.
Making Only Minimum Payments If you are unable to settle your credit card statement balances or loan balances in full each months, it is advisable to pay more than the minimum. Paying extra shows better credit management to the potential lenders and credit bureaus as compared to the minimum payment. On the other hand, failing to pay more than the minimum every time is seen negatively in the long run. Hence, when one fails to make payment, credit is lowered immediately, but consistently making minimum payment has a slow but steady effect of lowering credit.
Challenging All Adverse Information on Payment You are fully within your rights to challenge late payments, missed payments, or other erroneous information in your credit report with credit bureaus. However, denying all negative items could alert credit monitors that something might be amiss. This can also have a negative impact on your credit worthiness as a borrower should you apply for loans or credit in the future. If there are no clear-cut mistakes in account records, it is wiser to let small negatives die off rather than have a pile of dispute letters on the file. Far too many lawsuits push certain credit bureaus to pay more attention to and cross-verify other aspects of your history too. A couple of disputes regarding truly erroneous accounts is manageable, but challenging the entire negative history could be detrimental and cause score reductions.
