This score has a very significant role in the financial aspect of your life. It has its connection with interest rates of loans, rental applications, and many other things. It is for this reason that one needs to have an idea of the various things that could result in a drastic lowering of credit score. In this article, we will mention some of the most common evils that you should avoid to prevent them from pulling down your score.
1. Missing Payments
Failure to honor financial obligations in the form of loans or credit cards is one of the best strategies that will lead to a reduction in credit scores. The amount you owe is one of the major components that contribute to your credit score, specifically contributing 35% of the total score. Each of the late payments also remains on your credit report for up to 7 years. It will get worse if you have a good credit risk, as this is an indication that your credit score can be reduced by over 100 points if you pay your dues a month or even later. And if one misses several payments or goes 90 days without paying their credit card bill, it is even worse.
For this reason, if you cannot make a payment on time because of some financial difficulties then you should contact your lenders immediately so that you can discuss the possibility of extending your time for paying back the money before the due date elapses. Also, it makes it easier to avoid late payments by default since one can always set up an autopay option. If you do end up missing a payment, make sure to pay that as soon as possible to begin the process of fixing your credit rating.
2. Maxing Out Credit Cards
In particular, if you utilize much of your available credit, it gives a signal of higher risk to the lenders and, thus, significantly decreases your credit scores. Credit scoring models also use credit utilization, which is the ratio of credit currently in use to total credit available, by 30%. Ideally, one should avoid crossing the 30% threshold with lower being optimal.
The best way to destroy your credit score is to take one’s card to the limit and max it out as this can reduce the score by 50-60 points. Some cards can get depleted when maxed out to over one hundred points. It is even more stringent if your utilization has increased sharply in a specific month compared to the previous one in a steady manner. If you find yourself in a position where you have to maintain high card balances for a longer period, it is advisable to ask for an increase in the credit limit to keep your percentage utilization ratios low for both the individual card and the overall credit utilization.
3. Applying for New Credit
The credit application checks you do mean that each of your applications leads to a hard credit report check. The more hard inquiries are made within a short period, there will be problems, and the credit score reduced by 10 or maybe more for every inquiry. This is even more the case if you have few or new credit accounts that are larger than the first term. Any multiple mortgage, auto, or student loan application done within a couple of weeks or months at most is very bad.
But, not all inquiries are alike. Hard inquiry does not occur when a consumer rate shops for a single loan type such as an auto loan or a mortgage within a short period. Cross-shopping the same product type across different types of loans seems riskier at the same time. This implies that one should apply for credit only when he or she requires it instead of when he or she wants it to minimize the impacts of scoring repression.
4. Short Credit History
Another aspect of your credit history that affects your scores (generally, the average credit age across all your accounts). The longer the positive history, the better though some of these behavior patterns may take only a short time to change. Applying this strategy, several new accounts are opened at once, and this cuts down the average account age and deduction by more than 50 points before the accounts have the time to age and balance the extent.
This is especially true if you have a well-built credit record because applying for credit that one is likely to use does not adversely affect scores. Another way to limit history impacts is to keep the previous accounts active after completing payments for installment loans. Allow your lower balance older current assets more time to decrease their proportion in the age calculation as you let your higher-quality, longstanding revolving accounts take up a larger portion of it over time.
5. Unpaid taxes or any other claims such as liens or judgments
When firms delay outstanding debts associated with tax lien or legal judgments, credit scores can be destroyed very quickly. Unpaid tax liens and judgments transfer these responsibilities from local/state governments to national credit reporting agencies. At that point, these debts have the same implications as a delinquent loan or credit account in that it:
Just one unpaid tax lien or judgment can drive a score down into the 500s. This means paying off these collection accounts does not expunge them: the accounts list late payments and collections as detrimental to credit scores for seven years after the date of the event. If one finds himself/herself with tax liens or judgments, he/she must work to clear the records as soon as possible to reduce the impact on credit.
Consistently maintaining high credit scores and avoiding any kind of negative impact requires a positive credit history in the form of long-standing credit references, low balances, no missed or late payments, and few new credit applications. Nevertheless, a minor slip-up in one or two occurrences will not significantly damage the otherwise positive impact of the reports. Do not increase credit blunders as they are costly and time-consuming in the long run. However, if your scores do plunge dramatically, then financial literation and counseling may assist you in learning what behaviors you need to modify and how to plan for a long-term score rebound.
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