A credit score is among the most important factors lenders use to gauge your eligibility for loans. Lenders desire to lend to the most trustworthy borrowers because they need to profit. When a loan is defaulted, they often incur a lot of losses. While the loan amount can still be recovered, the process involved may be too costly. That is why a lot of focus is always put on the eligibility test. Credit score usually ranges from 300 to 850, and it is computed based on different factors. A score above 700 is considered good, and the borrower does not present a lot of risk to the lender. On the contrary, a score that falls below 700 is bad, and lenders will find it difficult to approve your application.
A credit score is built over time, it is not something that can be improved in a week. There are so many reasons why you may have a bad rating. For instance, something undesirable may have happened and render you unable to repay your loans. You may also have bad credit because you have never utilized credit. If your credit score is low, you have to work towards improving it. If you have a good score, then you should be careful enough to maintain it. It is always a bad feeling when an application is rejected. That is why we are discussing the things that affect your credit score. Understanding these factors will help you maintain a good standing before your creditors. Let us begin.
A late payment
It is essential to make payments according to the schedule. In general, payment history accounts for up to 35% of your overall credit score. Late payments can significantly damage your score. According to statistics from FICO, a 30-day late payment can lower a score of 780 by 110 points. This means you are moving downwards from good credit to bad credit within a month. A truth many people do not want to hear is that it is so difficult to improve your score than to lower it. Worse still, a missed payment may be reflected in your credit history for up to 7 years. So then, avoid late payments. We earlier mentioned that something undesirable can happen and render you unable to repay your loan.
Indeed, time and unforeseen occurrences affect all of us. While your ability to repay the loan may be affected, you can prevent more damage to your score by showing your lender commitment. If you anticipate a possibility of missing a payment, talk to your lender in advance. Some lenders are very understanding and can readjust your payment schedule, though at a cost.
Failure to pay
Failure to repay a loan has more devastating impacts on your score than late payments. The late payments must not necessarily be on loan for your score to be affected. If you continuously late rent payments, loans, and other bills, your credit score can be negatively affected. Again, if something unexpected happens and affect your ability to repay a loan or bills, talk to your creditors in advance.
Utilizing too much credit
The fact that you qualify for a loan does not mean you have to take it. Some lenders will approve your applications provided you are eligible. Nevertheless, too much credit utilization shows you overly depend on credit, and this could be a red flag. It shows you either in financial distress or you will be getting there soon. In general, credit utilization is computed by dividing the total credit you owe by the sum of your overall credit limits. To be on the safer side, you should maintain the ratio to a maximum of 30%, though below 10% is considered the best. Importantly, credit utilization ratio accounts for up to 30% of your overall FICO Score.
Hard inquiries
A hard inquiry often happens when your credit score is pulled for review whenever you apply for a loan. A hard inquiry drops your score by at least 5 points. This means a number of inquiries can significantly detriment your score. Generally, a hard inquiry affects your score for a period of between 6 and 12 months, though it will be reflected on your report for up to 24 months. This means you should also avoid applying for a lot of credit cards because a hard inquiry is always made when you do. If you actually apply for a lot of credit cards within a few months, you lose points because of the hard inquiries. Besides, with too many applications, the lenders perceive you as desperate for credit. According to FICO, borrowers with at least six inquiries stands a high chance of declaring bankruptcy.
Bankruptcy
Declaring bankruptcy hurts your score more than any other factor we have so far considered. In fact, it often costs between 130 and 240 points. Isn’t that too much? In addition, bankruptcy is likely to reflect on your credit history for up to a decade.
Collections and charge-offs
A collection happens when your lender sells the outstanding balance to a third party or an agency to collect it. A charge-off occurs when the debt is written off and usually happens when it is past due by 6 months. A more recent collection detriments your score more and can lessen an excellent rating by even more than 100 points. Like a missed payment, collections can last on your history for seven years.
The Bottom Line
A credit score is an essential factor that determines your eligibility for credit. It is vital to maintain a high credit score for a healthy financial life. As we mentioned at the outset, it takes time to build good credit, and therefore, you should be careful not to compromise it. There are so many factors that can negatively affect your score. We have discussed a good number here, and we hope the discussion has been helpful. We also want to caution you against predatory lending. Some payday loans can damage your financial life completely. If you are in dire need for funds, look for the best, such as online payday loans in Singapore. But what can you do to improve your score? The next blog will address that question.