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Your credit score is one of the most important financial information that you have. Lenders use it to determine whether or not you are a good candidate for a loan, which can also affect your ability to get a job or lease an apartment.
Knowing how important it is, it’s also vital to understand the factors that can decrease your credit score.
Hard Inquiries Made by Lenders
Every time you apply for a loan, a hard inquiry is performed on your credit record. A hard inquiry is pulling an individual’s credit report to know if they are creditworthy. Every loan company makes a hard inquiry on every loan applicant as a part of their application process. Therefore, it is inevitable.
This request will appear on your credit record for two years. Too many hard inquiries will make your credit score plummet significantly. You mustn’t apply for a loan if you aren’t sure yet. For example, if you plan to apply for a personal loan with a Wisconsin lender or a payday loan with a Texas lending company, you need to research and inquire first, ask questions about the loan, and only submit a loan application once fully decided.
This way, you can avoid unnecessary hard inquiries made to your account. Remember, each application you submit equals one hard inquiry. So, be wise when applying for a loan to avoid damaging your credit score.
Missed or Late Repayments
Your credit score comprises 35% of your payment history. If you don’t pay your financial obligations, such as your loan or credit card, expect to notice a significant decrease in your credit score.
Experts say that a perfect or almost perfect payment history is vital if you want to increase or maintain an excellent credit score. You have to consider that most lenders and credit card companies report every late or missed payment to major credit bureaus.
Although some may wait 90 to 120 days before reporting any delinquencies, some may start reporting after 30 days. Late and missed payments are also difficult to eliminate as they stay on your credit report for seven years.
Your Credit Utilization Ratio
The credit utilization ratio is the entire amount of credit you owe. A high credit utilization ratio decreases your credit score as it signifies that you’re maxing out your credit card limit. Your credit utilization ratio accounts for 30% of your credit score. Therefore, you’ll notice a decreased credit score when you use your credit card too much.
However, your credit utilization can quickly fix lowered credit scores. The best way to ensure that your score is intact is to pay your balances in full and on time every month. It is also the best way to go about building your credit score.
It’s recommended to track charges you made for each card. This way, you can easily know whether you are almost at your limit and can slow down in utilizing your credit cards.
Not Having a Varied Credit Mix
Maintaining a good credit score also needs a little bit of creativity. You can still have a high credit score even if you only possess a few credit cards. Nevertheless, if your credit report contains a “credit mix” of more than one kind of credit, you could achieve a higher credit score.
A credit mix could consist of a mortgage, personal loan, auto loan, and a few credit cards. However, your credit mix won’t affect your credit score as it only accounts for 10%. But if you notice a slight drop or even a stagnant credit score, having a variety of credit mixes can help you increase your score slightly.
It can be used as a supporting effort to ensure that you cover all aspects of your credit score and increase it.
Your Credit History Length
Your credit history makes up 15% of your credit score. Therefore, it is advised to keep old accounts open to display a long credit history. The Fair Isaac Corporation or FICO takes three factors into account when looking into your account history. These factors are:
- The length of all your credit accounts, including the age of your oldest accounts, your newest account, and the average age of all open accounts.
- How long have specific credit reports been open?
- When was the last time you used certain accounts?
If you notice a sudden drop in your credit score and have recently closed old credit card accounts, that should be the culprit. If you want to maintain a high credit score or increase your current score, avoid closing any credit accounts, especially the old ones.
Remember to keep your credit accounts by using them to make a small charge regularly to avoid the issuer from closing your account due to inactivity. For example, you can charge a small batch of groceries on your credit card or set it up for an auto-pay so that you can’t miss a payment, plus you can be assured that there’s an activity on your credit account.
As per Experian, the longer your credit history is, the better your credit score. If you don’t have a credit card yet, getting one is a great way to improve your credit score in the future.
Keep These Things in Mind
Keep the mentioned factors in mind, and you’ll never have to worry about your credit score dropping. However, once you notice any downward trend in your score, use this article as a guide to figure out what might be the problem and do what you think is right to help increase it once more and ensure a smoother borrowing process.