It demonstrates how credit-worthy you are and remains one of the most vital figures in your financial sphere. It determines anything from loan interest rates to rental application, job offers, and many more. Since credit is this central and crucial, it is relevant to know what hurts your score most. Here is a review of the main causes that can lead to decline of your credit.
Late Payments The main factor that has the potential of lowering the credit score of an individual is a consistent delay in the payments on loans or credit cards. The first factor, payment history is the largest, which contributes to 35% of the FICO score calculation. It used to be the case that if one had a habit of paying 30, 60 or even 90 days late, it would lower the score significantly. Only one missed payment could reduce the score by up to 110 points. The above effects worsen if you have many late payments on your credit report spanning for months or even years. Creditors need to be sure that they will be paid back on time and that the bills will be paid regularly as due. Hence, if you fail to pay for a long time, it becomes a very severe sign of the creditworthiness and is very detrimental.
Maxed Out Credit Cards The next most harm/next most damaging factor is having credit cards that are at their limit/maxed out. This informs the lenders that you are stretched on what you are capable of repaying and therefore, the amounts you are willing to borrow. Suppose you have a credit limit of $10000 that could be spread across different credit cards. So it is ideal if your credit utilization does not exceed 30 percent. Thus, any balance up to $3,000 or even less is better. But if you arecharging $9,500 every month the card reveals that you are using those cards heavily to survive. This is significantly brought down by high utilization rates which reduce your scores by 10-20 points for each credit card that is almost fully utilized. When balances are spread across many cards, the effects are even more devastating.
Defaulting on Loans Failure to repay a loan or any other form of credit is yet another effective way of pulling down your credit rating. When it comes to credit, default is when you fail to pay bills for a long time that the creditor even sends the account to a collection agency. This severe delinquency appears on your credit file and is known to cause your credit scores to fall by as much as 160 points. It also stays on your report for 7 years from the first missed payment on the account of the credit. Anytime a lender is going through your file, those defaults are there, and the potential lender will consider you a high-risk applicant. This will also complicate matters when one needs to get approved for a new form of credit or better rates.
Collections Accounts If an account is forwarded to a collection agency, the effect is as bad as a default or even bankruptcy. Collections implies that you have never made suitable arrangement with the original creditor concerning payment. So they shut it and passed the same to a collection agency. It will also report to the credit bureaus that the debtor has not paid the amount as required. That immediately goes a long way in signaling to lenders that you are negligent with payments and should not be granted credit again. When it comes to collections, even if you make an effort to pay off the amount in the collections and clear that – it will remain on your report for 7 years. It is for this reason that one collections account can cost anyone between 85-160 points on his/her credit score.
Bankruptcy This sort of credit event is next only to fraud and is in fact, the worst thing that a debtor can do. In this case, filing for Chapter 7 or Chapter 13 bankruptcy means alerting creditors to the fact that the debtor cannot afford to pay for debts. It will stay on your credit history profile for at least 10 years and reduces your score as low as 240 points. Other major effects include; losing a home, car and other property, pay cuts or having some of their wages seized. Bankruptcy also remain in employment background check and makes it almost impossible to secure a new job or to get approved for new loans or rental housing. In other words, with most lenders, you will be considered too risky.
Tax Liens In case you fail to meet your obligations in taxes to the federal or state authorities, the government puts a lien on your property. Tax liens are filed with the government and immediately show up as public information and negative account history on your credit report. They indicate that you failed to meet your tax obligations and undertook evasion on the same. Therefore, their tax lien may bring their credit scores down by over 100 points. This is because even when the lien has been removed after paid for owed amounts, remains part of one’s history for seven years.
Judgments Just as with tax liens, any unpaid judgment against you becomes public record, for anyone to find. These judgments are formed from unpaid medical bills, delinquent on rental, or non-payment of credit card bills if the credit card company decides to sue. High credit score means having a good judgment which is financially wrong. Just as soon as the changes take place you will notice a decrease in the credit score to a range of 150 points. And it remains in your report for seven years from the date of the judgment.
New Credit Applications =3/4 of total number of inquiries An even a small change in your behavior may cause your score to drop: applying for new credit cards or loans. The percentage that credit inquiries contribute to your overall score is small, only 10 percent; however, the frequency of new credit inquiries is considered risky by potential lenders. In general, make sure they apply for credit less than five times in the next two years’ period. It is – numerous requests and at each of them you can lose several points on the score. Even when the application that reduces your score by five points is only one, it is still negligible. However, if you fill the application for credit cards or loans within short time frame say within 2-3 weeks you are likely to see the score drop by 25-50 points.
Fixing Credit Score Damage The good news is that most credit events except for bankruptcies are not lifelong sentences and clients can get their credit back on track. After some time, the payments, defaults, judgments, and collections are removed from your credit report, which usually takes between 5-7 years. Of course, it is best to not make these credit mistakes in the first place and keep a check on your credit score. However, if one’s credit score is not very spotless and have incurred some lows don’t worry. Here are some tips to rehabilitate your credit over time:Here are some tips to rehabilitate your credit over time:
- Pay all the accounts due at the end of the month and make all subsequent payments on time.
- Reduce credit card balances and loans in an effort to reduce the overall utilization ratio.
- Never apply for new credit until your credit score bounces back
- The third action plan that the firm should undertake is to contact creditors and attempt to negotiate on the collections.
- Before you make any decision regarding your credit score, it is advisable to challenge any error that you find on your credit report.
- If ever, the debt burden feels unbearable, then credit counseling could be helpful.
Therefore when following health credit habits do not expect your scores to change overnight just remain patient, keep on practicing and your scores will improve. However, they understand that it took time to harm your credit score; consequently, it takes time to improve the score as well. They help you understand which factors are detrimental to your progress and how you can avoid repeating the same mistakes as you work on repairing your credit score.
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