4 Factors That Will Drop Your Credit Score
- A credit score is an important metric that financial institutions use to gauge whether an application should be accepted.
- Credit scores take time to build up, but poor financial decisions can reduce it significantly.
- Knowing what credit traps to avoid is essential to building and maintaining a high credit score.
In the world of credit, there are several traps that can keep you from achieving a high score. Here are four credit traps to avoid or minimize in order to achieve and maintain a high credit score.
Late Payments
Your payment history significantly impacts your credit score. Any negative payment reporting, including late or missed payments, accounts sent to collections, or bankruptcies, will lower your credit score. Therefore, in order to maintain a high credit score, the best thing you can do is focus on making on-time payments.
Thankfully, a late payment doesn't impact your credit score forever. Generally, it will remain on your credit report for seven years. More so, as your late payment gets older, it starts to impact your credit score less. For example, a late payment that has been on your credit report for two months may drop your credit score by 10 points, but the same late payment that is still showing on your credit report will have less impact on your credit score in five years.
Maxing Out Your Credit Card
If your credit card balance or utilization is higher than 30% of your credit card limit, it will lower your score. For example, if you have a card with a $500 limit, then you should charge no more than $150 on your card. If you charge more than $150, your score will drop.
According to Bankrate, credit utilization refers to the amount of credit you have used compared with how much credit you have been extended by a lender. It also refers to a ratio that lenders use to determine your creditworthiness and is a factor used to determine your credit score.
No Credit or Short Credit History
Your credit history makes up 15% of your FICO score. This means that having an extended credit history helps your score.
In the early stages of building your credit, you can't control your credit history because it is controlled by time. However, over the years of building your credit history, ensure that you are strong in the other areas that impact your credit score, such as on-time payments and keeping your credit balances low.
If you have a long credit history, don't be too quick to close an older account. For example, if you have had a credit card with a $5,000 limit for five years, keep the account open even after you have paid off the credit card. Having the card for five years shows positive credit history. If you choose to close the account, your score will most likely drop.
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Too Many Credit Applications
Credit applications make up 10% of your credit score and remain on your credit report for two years. Since every application impacts your score, you should only apply for credit when needed.
New credit applications are called inquiries. Credit applications include applying for a bank loan or a loan for a car or house. It is important to note that only hard inquiries, which require the lender to run your social security number, impact your credit score. Soft inquiries, which do not run your social security number, do not.
Recommended Read: Difference Between a Soft and Hard Credit Inquiry
There are some exceptions to applying for credit. For example, with an auto loan, it is a good idea to apply to a few credit lenders so that you can choose the best rate. If you apply for auto loans with a number of lenders within a two week period, then all the applications will impact your credit score as one inquiry. The same applies for a mortgage.
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How to Build and Maintain a Good Credit Score
Pay Your Bills On Time
Making sure your bills are paid on time is an important factor that affects your credit score. Statistics show that 64% of Americans have paid a bill late before, meaning their late payments had a negative impact on their credit score. To make sure no late payments are made, pay off the outstanding balance in your credit accounts within 30 days of the items you purchased.
If payments are made after the 30 days, they are considered late payments, meaning it can affect your score and reduce your chances of getting lower rates. To prevent this issue from arising, try to restrict your purchases to items that you know you can pay for at some point within the acceptable payment period.
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Check Your Credit Reports
Another way you can build and maintain a good credit score is by checking your credit reports from time to time. Getting an updated credit report is beneficial because it gives you an idea of where you can improve your credit score. Also, checking your credit report could be beneficial as it can help you detect fraud. If you notice any odd transactions that affect your credit score, you can report them to the respective financial institution for the next steps on how this fraudulent matter can be solved.
However, if you fail to notice these fraudulent transactions early on, the scammer could cause serious damage to your credit score. Since that is a scenario that you do not wish to happen, check your credit report from time to time and go over your transactions to lower the chances of fraud happening.
Recommended Read: How to Protect Yourself Against Credit Card Fraud
Length of Your Credit History
The length of your credit history is a reference to your experience. A longer credit history will improve your credit score because it speaks to your financial reliability. To build your credit history, you have to actively use a credit account. To ensure that you are also improving other parts of your credit score, make sure to only purchase items you know can be paid off on time.
Paying these expenses on time and actively using your credit card will increase your credit score and give you long-term benefits when applying for additional credit.
The Money Wrap-Up
A person may require a loan from a bank to purchase, such as a car or a mortgage. Since these items require a large amount of money, having a good credit score will increase your chances of getting approved and receiving a lower interest rate.
Therefore, familiarizing yourself with credit scores and how to prevent mistakes will lower chances of making mistakes that will decrease your credit score. Remember that whenever you are dealing with money, you must be responsible, as irresponsible actions can negatively impact your finances long-term.