You may know that paying your bills on time will cause your credit scores to increase, but beyond not paying said bills, you may not know what can cause your scores to drop. Such knowledge is important, though, since so much forward movement in life requires a positive credit history. With that in mind, here are factors that can lower your credit score.
Your Credit Score
Your credit score essentially reflects your history with money. Years ago, the FICO scoring system — the most common of all such systems — was used almost exclusively by lenders to assess the likelihood a prospective homeowner would repay their mortgage. Now, the score is used by all manner of lenders to decide whether to lend to you and at what rate. The higher the score, the better.
Your credit history is gauged by three major credit bureaus: Equifax, TransUnion, and Experian, which render scores that range between 300 and 850. The scores are broken down thusly:
- Bad credit: 550 or under.
- Poor credit: 550 to 649.
- Fair credit: 650 to 699.
- Good credit: 700 to 749.
- Excellent credit: 750 and more.
Note that there can be some variance among scores, usually because information can differ, as can weight factors.
Score Determinants
Your score will depend on the following factors:
- Payment history. This is whether you make timely payments, and factors in detail concerning late payments, such as why they were late and how many there are on your report. It also considers any liens, lawsuits, foreclosures, or bankruptcies.
- Credit utilization. This is how much you owe relative to how much credit you have available, across all credit types.
- Credit age. This is the amount of time that’s passed since your credit accounts were established and since they were used.
- New credit. This encompasses new accounts, recent credit inquiries, and the amount of time that’s passed since your last inquiry.
- Credit mix. This is the number and types of credit accounts you have.
What Causes Your Score to Drop
Here are the top drivers of credit score depression:
- Late payments. While lenders might cut you slack on the odd late payment (over 30 days), they’ll look askance at consecutive late payments, which will for sure hurt your score. Late payment of more than 90 days on any type of account will obviously damage your scoring the most. If this is you in the Golden State, look into California debt consolidation or debt relief programs California.
- Excessive hard credit pulls. Applying for too much credit or loans around the same time could cause your score to dip a bit because that usually requires hard pulls of your credit report. One pull will temporarily subtract five points or fewer from your score. However, if you have several pulls, count on a noticeable drop. Whatever the case, each inquiry will remain on your report for two years.
- High credit utilization ratio. The rule of thumb is that your credit card balance should not exceed a third of your credit limit. Plus, you don’t want to give the creditor the idea that you’re overly reliant on your card.
- A languishing credit card. It’s true that you must watch your credit utilization, but many people don’t realize that just letting a card “sit” is also not good. If you don’t use your new plastic, the issuer has no way of gauging, really, how responsible you are. Thus, unused credit cards can lower your score.
- Loan default. A delinquency is a failure to make loan payments for between 30 to 90 days. While your score will drop, you can improve the situation by simply paying your balance. Defaults, on the other hand, are more serious and harder to fix. They usually denote delinquencies of more than 90 days, and are, as you can guess, more damaging to your score. Then there’s a “charge-off,” which happens when you’re so late your lender basically writes you off. Charge-offs stay on your report for seven years.
- Canceling your credit. Before you make such a move, consider that possessing fewer cards could result in too much reliance on a single card, which affects utilization rates. Also, a longer credit history demonstrates a track record of responsible use.
Understanding the factors that can lower your credit score is the key to building good credit — and sustaining it. Now that you do, perhaps you can create better financial habits that will benefit you over the long term.