There are obvious reasons that could drag our credit scores downsuch as defaulting on loans, getting a judgment, home foreclosure, and filing bankruptcy. However, there are several factors that could affect our credit score that we are not commonly aware of. Here they are.
About 35% of your credit score is made up of your payment history. Being late consistently on your payments will have a huge impact on your credit rating, so always make it a habit of paying your bills on time. Furthermore, completely ignoring your bills may lead to charge-offs, which will have a more detrimental effect.
Overusing all of your available credit
The second highest component of your credit score is credit utilisation, which is the ratio of your balances to your actual credit limit. Having a high balance in relation to your credit limit will increase your credit utilisation, which will in turn, lower your credit rating. Ideally, you should keep your credit card balances below 30% of the available credit limit to keep your credit score healthy.
Closing old accounts
The length of your credit history makes up for about 15% of your total credit score. Whenever you’re applying for a loan or line of credit, the lender will look into how long since you’ve started getting credit. This is why you shouldn’t close old credit cards, even if you’re not using them anymore because it would make your credit history appear shorter. More importantly, you shouldn’t close accounts with balances on them.
Too many inquiries
Each time you apply for credit, the lender or provider automatically posts an ‘inquiry’ in order to access your credit report. An inquiry is a record that lists down who pulled out your credit report and when. This accounts for about 10% of your credit score. Since it is a statistical fact that borrowers with a higher number of inquiries tend to be riskier than those with fewer inquiries, credit bureaus can lower your credit rating if they found out that you are excessively shopping for credit.
Having only one type of credit
While it’s wise to be careful about using credit, it’s not advisable to avoid credit altogether. Having only one type of loan or credit card could also affect your credit score because 10% of it comes from the mix of credit that you have. Having several types of loans and lines of credit means that you are more capable of managing your credit properly.
Settling your debt
Debt settlement means that you’ve made an arrangement with your creditor to pay an amount significantly smaller than what you originally owed. While it may seem like you were able to cut costs, you are not doing your credit score any favour. Settling your debt will not stop your creditor from reporting the situation. If you’re having difficulties paying back the loan, the best way is to talk to your lender and come up with a reasonable payment term that would help you finish off the repayments over time.
Constantly leaving balances on your revolving credit can hurt you in so many ways. First, it increases your credit utilisation. Second, it hurts your credit rating because it would appear that you are not attending to your bills. Lastly, carrying balances repeatedly can cost a lot of money over time.