One of the highest numbers in your financial life is the FICO score as it defines a person's creditworthiness. Employed by lenders to evaluate the creditworthiness of a borrower concerning loans and credit cards, this is a three-digit number between 300 and 850. This is so because a better FICO score indicates to the credit provider that you are a low-risk client; a low score indicates that you are a high-risk and may therefore be refused credit or charged high interest rates on your loans.
Though knowing what factors contribute to a strong credit score is important, knowing what does the reverse and lowers the score is also beneficial. These are some of the key causes that could over time lower your FICO score.
Missed Payments A third of your FICO score comes from payment history. Every late payment lowers the score; the score decreases more the more delinquent each late payment is. Missing a payment for 30 days, for example, can subtract some points from your score; missing a payment for 90 days might cause your score to drop by more than 100 points; turning over your account to a collection agency may do the same. Late payments are more severe the more often they occur; so, they probably will lower your score.
High Credit Utilization The second most important factor of your FICO score is your credit utilization rate, the ratio of the money you owe on your credit cards to the total amount of your available credit. The ideal credit utilization should be below 30 percent, and the closer to zero, the better. This is because maxing out your credit cards or having high balances that are very close to the credit limit can easily lower your score by 50 points or even more. Avoid using much of your credit limits close to your statement date because it is best not to have high utilization rates reported to the credit bureaus.
Following too many new accounts This is made every time you apply for new credit when an inquiry is made on your credit report. A lot of inquiries and new accounts substantially reduce your score in a short period. This signals to creditors that you are actively seeking credit or that you are too deeply in debt. Every new credit check can lower it by several points, and if several accounts are opened within several months, it will reduce the score significantly. New accounts also reduce your average account age and this also lowers your score.
Closure of Old Accounts However, there are also cases where on the same note closing your older credit card accounts may decrease your score. This is because it lowers your overall credit limit and raises your credit utilization rate at the same time. It also reduces the average age of your accounts–another component of your score. It is better to preserve the old accounts and use them than to close them because that will make your credit score to be higher.
Not Paying Other Bills on Time Hence, your FICO score is not limited to credit card repayments; it factors in all the accounts in your credit report. Missing on personal loans, auto loans, student loans, medical expenses, and other credit accounts is unfavorable for your credit score. If you were never late on credit cards but were late on other accounts, I promise you that you will see a significant decline in your score.
Co-Signing On Risky Loans: When you sign as a guarantor for a family member or friend who has a bad credit score, then your score will also be affected. This is so because in case the first borrower fails to pay or is declared bankrupt, this will automatically affect the credit rating of the secondary borrower and render it poor as well. This implies that you can lose a lot of points even with a single instance of failing to make a payment on time for 30 days. Do not co-sign loans unless you are comfortable with the ability of the other individual to make regular payments.
Applying for Too Many Credit Cards It is unadvisable to apply for and open many new credit accounts in a short period because it is usually detrimental even if you are a good credit user. What you find in your report includes store cards, credit cards, personal loans, and the like. To open more accounts than what is usual indicates higher risk and brings down the average age of your credits. Instead of carrying on opening new credit accounts try as much as possible to maintain the ones you have.
Getting Accounts to the Collection Stage Some things reduce your score more than others and one of them is having an account placed with a collection agency such as an unpaid medical bill or utilities. This is because you could easily see your FICO score drop over 100 points. Credit scoring models essentially measure one’s ability to manage repayment of financial obligations, and non-payment leading to collections is considered high risk. Try to talk to the creditor to find out whether you can pay or negotiate on the amount before it goes to the collection agencies.
Delayed payments due to difficulty Sometimes certain life situations arise and despite the best of intentions the borrowers cannot afford to make their payments. Sometimes it becomes impossible to pay the agreed amount of money on the due date due to factors such as loss of employment, divorce, illness, or major damages to one’s household. Although lenders may not be very harsh on the circumstances if they are informed often, it does not mean that it is beneficial since it allows for late payments to be reported. For the most part, there is not much that can be done other than attempting to get back on course as soon as possible.
I just hope that from this breakdown, you get an idea of what generally reduces people’s credit scores. Try to review your credit activity often so that you will notice any issues arising. Ensure that they pay all their bills without fail, use a low credit ratio on credit cards, and refrain from opening many credit accounts. Aim for at least 740 or more to be considered for the best loan rates. Do not get discouraged if you have had some obstacles or payment issues because it can take time to increase your score. Appropriate use of FICO hence shows that consistent good financial behavior over time helps it recover.
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