5 Habits that Ruin Your Credit Score
The credit score is a 3-digit statistical number that represents your creditworthiness or ability and willingness to meet your debt and financial obligations. It is assigned by credit reporting bureaus and usually ranges from the lowest 300 to the highest 850.
Although each credit bureau uses different scoring models to determine a good credit score range from a bad credit score range, all share a uniform principle: The higher your credit score, the lower the risk for lenders and the easier for you to get a loan or credit card.
Your credit score is based on your credit report, which is a compilation of various information on your credit history and attitude towards past debt that is submitted to the credit bureaus by your previous lenders. Your future lenders will rely heavily on your credit report and score to decide whether or not they should grant you the funds. They will also use this information to calculate the interest rate and terms of your loan.
Are you building a good or bad credit score?
It takes time to build a good credit score. You often start by obtaining a credit card or a credit builder loan. Then, you pay your dues on time and refrain from using your credit card near its spending limit or maxing it out. You also maintain a positive cash balance in your bank account and make regular deposits while avoiding frequent withdrawals and cash overdraft. All these things reflect on your credit score. However, they cannot be done overnight but take several months to accomplish.
Ruining your credit score, on the other hand, is fast. Habitually paying your debt late and maxing out your credit card limit can quickly make your credit score plummet. This is why it’s very important to observe good credit-building habits and avoid those that leave a negative mark on your credit report.
Avoid these 5 habits that ruin your credit score:
1. Paying your monthly obligations late
Your payment history makes up 35% of your total credit score, which is the biggest factor that affects it. Thus, if your track record in making payments is full of delinquencies and defaults, your credit score will definitely be terrible. Aside from causing a wreck on your credit score, you will also usually be charged for late payments. You may also be paying more on interest rates when securing loans and credit lines in the future.
Hence, it is important to immediately address any issues on your payments. If you think you may be late on a payment, contact your lender or credit card issuer immediately. Although not common, some creditors move your due date to later in the month.
2. Having a high credit utilization usage
Another important factor that lenders look for when assessing your creditworthiness is your level of debt, making up 30% of your credit score. High credit utilization damages your credit score. This includes having a large amount of active debt and high credit card balances (around above 50% of your credit limit ) from month to month. The lenders generally assume that you are financially struggling and are using your credit cards to make ends meet.
To improve your credit score quickly, pay down your loan balances fast. Keep your credit card utilization at 30 per cent or less of its spending limit.
3. Applying for multiple loans or credit cards
It’s smart to do loan shopping and compare loan interest rates and terms before settling for one. Take note, however, that when you apply for a loan, the lender pulls out your credit report from a credit reporting bureaus (CRB). The CRB, in turn, records this on your credit profile as a “hard inquiry”. The more lending companies you apply for a loan, the more inquiries are made on your credit report. The CRB will interpret these multiple inquiries as multiple loan applications, which decreases your credit score.
Hard inquiries made from the last 12 months affect your credit score by 10% and stay on your credit report for two years. While one or two inquiries won’t affect your credit that much, several inquiries within a short period of time will do the damage. To preserve your good credit score, keep your credit applications minimal.
There is, however, a 14-day or more window for loan shopping. This is a period after your first loan application when all your succeeding applications are treated as one. This period varies from 14 to 45 days depending on the credit scoring model used, but the newest credit scoring models use a 45-day window. Whether you make 5 or 15 applications, they will count as just one inquiry. Make use of this window period to do all your loan shopping.
4. Closing credit cards with remaining balances
If you close a credit card with a remaining balance, it will cause a sudden increase in your debt utilization ratio. This is because even after you close it and the card has a “closed” status, it continues to be reported to the credit bureaus along with your monthly payment history updates.
A portion of your credit score is determined by your total available credit. Removing the credit card also removes a chunk of the credit granted to you. For instance, you have a total available credit of $20,000 and $10,000 of it is used. Of this $10,000 credit use, $5,000 comes from your credit card. If you close the card, your available credit drops from $20,000 to $15,000. If the card is “maxed out,” your used credit remains at $10,000. This causes a sudden increase in your credit ratio, which negatively affects your credit score.
5. Ignoring your credit reports
Various studies over the years have claimed that about 80% of credit reports include at least one error. Thus, it is important to check your credit reports regularly to check and dispute any false information and errors. Failure to do this could cost you a good credit score and even thousands of dollars.
You are entitled to a free copy of your credit report from the credit reporting bureaus every year. Use this opportunity to check your credit reports for accuracy. If a lender falsely reported you to make several late payments, these records will show on your credit report. If unknowingly became a victim of identity theft and someone has opened credit card accounts in your name, this will also be reflected in your credit reports.
Be ready to dispute any errors with the credit reporting bureaus. If all three credit bureaus record the errors in your credit profile, send a dispute letter to each CRB separately. It will take several months for CRBs to fix or remove false information on your credit reports. The sooner you check your credit reports for errors, the sooner you can fix your credit score.
Loans For People With Bad Credit offers various financing for people with low or damaged credit score across Australia. They have over 30 different lending partners to help match the correct loan for you. Call us on 1300 769 384 to talk to one of our lend specialists or fill out our Bad Credit Loan Pre-Approval form. We will not run a credit check until we have spoken with you.
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