Actions That May Impact Your Credit Score
Your credit score is one of the most important financial numbers you have.
Just as your score can have a positive impact on your finances, it can also have a negative one. Unfortunately, credit scores can be a bit difficult to understand. According to USA TODAY, a study found that most Americans don’t understand how common actions impact their scores. This misunderstanding can lead to overpaying, damaged scores, and denial of credit. We’ve broken down a few actions that impact your credit score so you can learn how to use them to your advantage!
Missed or Late Payments
A credit score is designed to show your ability to repay a loan. Missed or late payments will not only lower your score, but will make you appear to be a risky borrower. Since your payment history makes up 35% of your credit score (more than any other credit category) it’s very important to always make timely payments. Consider signing up for calendar reminders or automatic payments. These will help keep you on top of your due dates and decrease your risk of late payments and late fees!
Using Too Much Credit
Your credit utilization ratio is the amount of credit you use vs. your available credit. When your credit balances are high, you indicate to a lender that you may be a high-risk borrower. Instead, consider using less of your credit. This will show lenders that you don’t need to rely on your credit cards and to get by. It is typically recommend using only 30% of your available credit. While this is not a credit rule or law, you may want to use this as a guideline.
Cosigning A Loan
At one point or another you may be asked to cosign a loan. Cosigning a loan can help the borrower establish credit or receive a lower interest rate. While cosigning can be beneficial to the borrower, it can also come with severe consequences. Make sure you trust the borrower to practice smart credit habits. If they make late payments or miss them altogether, both of you will have negatively impacted credit!
Applying for Credit Too Frequently
While all credit inquires may affect you differently, a request for credit may lower your score if too many appear on your report. Each time you apply for credit, a hard inquiry will appear. Too many inquires can make you appear to a lender as a financial risk. Since applying for credit is necessary to receiving credit, a few inquiries will not affect your score that much. In fact, FICO has now taken into account that multiple inquiries in a short time mean you’re probably shopping around for rates. Depending on the FICO scoring model used, they may only label this as a single inquiry.
When someone files for bankruptcy, a derogatory mark will remain on their credit report for 7 to 10 years. This can do serious damage to your score and can make it tough to bring it back up. It is important to know that bankruptcy is not your only option when you’re struggling with debt. Consider giving Tayne Law Group a call at 631-470-8204, and find out how we can help you lower your debt without resorting to bankruptcy.
Closing Credit Accounts
Many people close credit accounts for the right reasons, but end up hurting their credit score in the end. They may want to avoid overspending and taking on debt and believe closing credit accounts will help. While this may curb your spending habits, you will also be closing the available credit you had on the card – and possibly your oldest line of credit.
Now that the card is cancelled, your utilization ratio will soar. For example, say your overall credit limit is $5,000, and the card you close had $2,500 worth of available credit. If your debt on your other cards totals $1,500, you’re now using 60% of your available credit. You may make yourself look like a risky borrower!
Practicing smart credit habits should be part of your daily financial routine. Your credit score will come into play when you look to make many financial decisions. A low score can hurt your chances of receiving a loan and will affect the rate of your loan. By limiting credit mistakes, we can increase our scores and save more money! How do you practice smart credit habits? Have you ever made a credit mistake? Feel free to leave your comments!