Things that will kill your credit score
Credit score is very important and it’s a must to do everything in one’s power to take a good care of it. The problem is that credit score can be a very tricky thing to handle to say the least. There are some moves that are obviously harmful to it. For instance, having a habit of paying late. But then again, there are also some moves that aren’t so obvious when it comes to its negative impact. In fact, there are moves that are thought to be beneficial, but turn out to be harmful to credit score in the long run. It is therefore useful to know the things that can cause harm to your credit score so that you can avoid them.
First of all, you have to get some things about credit score straightened out. Credit score is your ability to borrow from banks and other financial institutions. If you have bad credit, you would simply have a hard time borrowing or getting loans. Your credit worthiness is determined by your credit report and your credit score.
Credit score and credit report are two terms that have been used interchangeably and it is not surprising if you believe that they are the same. Your credit report is a record of how you handle your credit and your financial obligations. It shows your payment history, the credit balance that you have and other relevant information. Your credit score on the other hand is a numerical representation of your credit performance. It is computed using information that comes from your credit report. What you do with your credit will ultimately be reflected on your credit score. That’s how your credit worthiness is determined.
Banks, credit unions, lenders and other financial institutions use your credit report and your credit score in deciding whether to do business with you or not. There are even some companies now that rely on it which you would not usually associate with the practice.
Credit bureaus keep track of how well you handle your credit. Creditors report to them on the performance of consumers. If you miss a payment for example, then that would be reported to the credit bureaus. The same creditors would check with the bureau if you apply for a loan. They use the credit information and the credit score as a means of predicting your behaviour. If you didn’t pay your loans in the past then you are most likely to do the same thing in the future. It’s not a perfect system but creditors rely on it to secure their money and to reduce the risks that they are facing.
Importance of Keeping a Good Credit
Now you understand why keeping a good credit score is of prime importance today. Getting a loan is the only way for most people to be able to buy a house, a car and other important things in life. You need it to get credit cards. It is possible to get a loan with bad credit and in fact a lot of people succeed in it, but it is not easy. Thus it’s better for you to do everything to maintain your good credit standing.
Things That Will Kill Your Credit Score
In order to maintain a good credit score, you should know what could pull it down. To help you out, we have listed several of the things that can kill your credit score .
This one should come as a no surprise for you. The biggest factor in calculating your credit score is your payment history. Under FICO scoring system, which is the one most commonly used, it makes up 35% of the final credit score. Missing a single payment can have a negative impact on your score.
There are several things to consider with regard to impact of late payments on your credit score. If you have been missing payments recently then that would have a more serious effect than having missed payments a few years ago. If you were only late a few days that would have a less serious effect than being late for a few weeks.
Closing Credit Card Accounts
You might be surprised with this one. If you have been reading some online guide for improving your credit score, you must have come across an article that says you should close unused credit card accounts.
When you close a credit card account, its history will be removed from your report after a number of years. So even if you have a good history with that account you will no longer benefit from that. Age is also one of the factors that creditors are looking for. Borrowers with long credit history are seen as having more credibility so it makes sense to hang on to those old credit cards even if you are not using them. Closing a credit card account will also lower your utilization measurement which makes up 30% of your credit score.
Settling with your Lender
When you have past due account and you are negotiating with your lender you will normally be offered a settlement. This is an arrangement, where you pay an amount that is significantly lower than what you owe, to take care of the past due account. If you owe $10,000 the lender might say that they are willing to accept $7,000 for what you owe. Who wouldn’t want to grab such a deal?
In reality, agreeing to settle a past due account with your lender is a bad idea. That’s because they would report the amount that you didn’t pay as a negative and in most scoring systems that would just be as bad as any late payment. So unless you can get some assurance from the lender that they will not report the remaining amount as a deficiency balance, then you should never agree to a settlement.
Having a High Balance on Your Credit Cards
When you have a high balance on your credit cards will also pull down your score. The ideal percentage of use is around 10%. That would be very hard to achieve for some people. It is a must for you to try and use your credit cards as sparingly as possible. Credit cards can be useful financial instruments if you know how to use them. But if you fall into the temptation of using it on shopping sprees then expect your score to go down.
Shopping for too Much Credit
Every time you apply for a loan or a credit card, the creditor checks on your credit score and each inquiry is noted down by the credit bureaus. That becomes a factor when your credit score is being computed. If it shows that you have been shopping for too much credit lately, then it could have a negative impact on your credit score. Based on statistics, consumers who are shopping for more credit tend to be higher risk borrowers.
Believing Credit Scores Are the Same
Credit and credit score are confusing topics and we are trying to simplify it as much as possible here. In reality, there is much to learn about it. One important fact to keep in mind is that there are many types of credit scores and believing that they are all the same can be bad for you in the long run.
Lenders have different standards when it comes to judging whether a consumer is creditworthy or not. If you rely on one type of credit score that could lead to problems since the lender that you want to borrow from might not be making use of it.
Companies use credit scores to predict things other than credit performance of a consumer. Insurance companies have models that can predict the possibility that you will file for a claim. In the same light, some companies also use credit scores to predict if you are going to file for bankruptcy. These different uses of credit scores can lead to confusion on your part which could lower your credit score even further.
Not Knowing that you Have Three Credit Reports
Your credit score is eventually determined by what is in your credit report. But you should be aware that you have three credit reports to think about. There are many credit reporting agencies, which are companies that compile your credit history. They are the ones that issue credit reports and there are three major credit reporting agencies out there. It is possible have different information in each of three credit reports, which could result in different credit scores. You should check with all three credit reporting agencies in order to be sure that everything is in order.