Hold onto your wallets and purse strings, folks! Your credit score is far from just a dull number. It’s more like your financial charisma – the higher it is, the more enticing you appear to those glorious moneylenders out there. It’s like having a sparkling smile in the world of finance; lenders love it and reward you with sweet deals on loans.
But, like a teeth-filled grin after a blueberry pie-eating contest, a lower score might not have the same allure. In fact, it could leave you in the cold world of “loan limbo” or worse, stuck with interest rates that would make even a loan shark blush.
The cruel twist of the tale? Most folks don’t give a second thought to their credit score until they’re about to dip their toes in the loan lagoon. Your credit score, my friends, is like a mirror reflecting your debt demeanor, impacting everything from your mortgage interest rates to your ability to rent that swanky city-center apartment. So let’s dive in, shall we?
Late payments
Late payments are a clear factor that can negatively impact your credit score. When you fail to make a payment and exceed the 30-day mark, it will be recorded on your credit report and cause your score to decrease. Surprisingly, even a single missed payment can lead to a drop of up to 100 points in your score.
Once an account becomes delinquent, it can continue to harm your credit score even if you catch up on payments later. Additionally, late payments may result in extra fees and charges imposed by your creditors. If you’re facing financial difficulties and struggling to meet your obligations, it’s crucial to reach out to your creditors as soon as possible to arrange a payment plan.
Using a credit card can be beneficial when you’re working on improving or fixing your credit. This is because a portion of your credit score depends on your “credit utilization ratio,” which measures the proportion of credit you’re utilizing in relation to the credit available to you.
Ideally, it’s recommended to keep your credit utilization below 30%. To put it simply, suppose you have a credit card with a credit limit of $1,000. It is advisable to aim for a credit card balance that is lower than $300 (which is 30% of $1,000).
Closing old credit card accounts
Many individuals believe that when they no longer require a credit card, the best course of action is to terminate the account. Although this might appear to be a prudent approach to credit management, it can actually harm your credit score.
Creditors generally view active accounts more favorably, so closing an account can negatively impact your creditworthiness. Additionally, closing an account will decrease your credit utilization ratio, which compares the amount of debt you have to your credit limit.
A lower ratio is generally advantageous for your credit, but closing an account can suddenly reduce your available credit, thereby increasing your ratio.
Applying for too many credit cards at once
A majority of individuals in the United States typically possess an average of four credit cards. However, it is crucial to be cautious when opening multiple cards simultaneously. This is because opening an excessive number of credit cards within a short period can have adverse effects on your credit score.
The reason behind this is that lenders perceive numerous credit inquiries as an indication of financial instability. Consequently, this perception can result in higher interest rates and reduce your chances of getting approved for loans or lines of credit.
Also, one of the factors considered in the calculation of your credit score is the number of hard credit inquiries on your credit report. These inquiries occur when either you or a lender requests access to your credit report, and each inquiry has a slight impact on lowering your credit score.
Having a high debt-to-income ratio
Having a solid grasp of how credit functions is crucial for maintaining a favorable credit score. A significant aspect akin to credit utilization, which we previously discussed as “Maxing out your credit cards,” is the debt-to-income ratio.
This ratio evaluates the extent of your debt in relation to your income. Lenders employ this ratio to assess your capacity to handle more debt responsibly.
Having no credit diversity
The diversity of your credit plays a significant role in determining your credit scores. It is beneficial to have a variety of debts, such as credit cards for revolving debt and student loans for installment debt, as this demonstrates your ability to manage different types of debts responsibly.
The presence of a diverse credit mix can have a positive impact on your credit scores for a couple of reasons. Firstly, it assures lenders that you have the capability to handle various types of debts responsibly. Secondly, it contributes to an improved “credit mix,” which is one of the factors considered when calculating your credit score.
Not having any credit history
Not having a credit history presents a significant obstacle when it comes to establishing credit. Every individual has to begin somewhere, and it can be a challenging process.
The absence of credit makes it tough to obtain approval for loans or new credit cards since lenders are unable to assess your borrowing risk. Additionally, the absence of a credit score can create difficulties in renting an apartment or setting up utilities under your name.
