Have you ever been denied a loan or mortgage application? If you have ever been in this or any other similar situation in the past, chances are your poor credit score is to blame.
Your credit score is what lenders and sometimes employers use to determine if you are a reasonable risk before approving your application for financial aid or even a job role. Unless you are extremely wealthy, having a good credit score is integral to having a healthy financial life.
There are certain aspects of your life that can contribute to a poor credit score. In this article, we take a look at some of them.
- Delay in making payments – One of the most common behaviors that put a red in your credit report is when you consistently delay in making payments. For instance, if you failed to pay your credit card bill on the due date, but paid it the next day, chances are your credit report will not be affected. However, if you delay to make payment for a much longer period, say 30days; there is a very high chance that your bank or card company will report this delay to credit referencing agencies (Experian, Equifax, CallCredit).
It becomes even worse if you repeat this delay consistently, an action that can have drastic effect on your financial stability. According to credit referencing company Equifax, even a one-time 30 day delay in payment can remain on your credit report for up to seven years. Imagine the effect this would have that number of years down the line.
- Missing payments altogether – Late payments can cause your credit score to drop significantly, but you can recover your lost points by paying your debts and keeping up with subsequent payments. However, missing payment altogether is a different ball game entirely. Your debts can be charged off to a debt collection agency. And even though you have already suffered some loss in points due to delayed payment, you will incur more losses if your debt is charged out. While it is easier to recover your points when you make a late payment, it is a bit more difficult with a charged off account. Even after you have paid off the debt, you will still have the original negative activity on your report and this can hang in there for seven years also.
- Opening too many lines of credit – While there is nothing inherently wrong with having enough lines of credit, it can also affect your credit score adversely. Anytime you apply for a new credit, a hard inquiry is made on your credit report. Your credit score will not be damaged if a credit referencing company accesses your credit report. These soft inquiries are used by companies or individuals as part of a regular background check process. In most cases, they are carried out without your knowledge and are not recorded on your credit score. A hard inquiry on the other hand is completed by a financial institution such as a bank or mortgage provider to find out whether they should accept your application for a loan, mortgage or new credit card. These hard inquiries are usually recorded in your credit score and can affect your credit.
In addition to that, opening multiple lines of credit at the same time will decrease your credit score because anytime your average account age is reduced anytime you open a new credit account.
- Maxing out your credit card – About 30% of your credit score is made up of the amounts you owe. This is also referred to as your credit utilization ratio. What this means in a nutshell is that, the amount you owe or your credit utilization ratio is the total amount of credit available to you versus the amount of credit you actually use. For example, if you have a credit card with a limit of £30,000 and you only use £6,000, your credit utilization is 20% of your total credit. What this means is that of you are in the habit of maxing out your credit card, it will adversely affect your credit score as you will be using more credit and by so doing owe a higher amount.
Financial experts recommend keeping the amount of credit you use at about 30% or less of your total available credit limit.
- Defaulting on a loan – Admittedly, there are times when meeting up with your repayment obligations for a loan or mortgage can be difficult, but if ignore the due date, you will end up defaulting. When you default on a mortgage, you risk foreclosure and if you default on a student loan, you will have to pay from your wages. But despite these penalties, your credit score will also be significantly affected. Just like a charged off account, defaulting can cause you to lose as much as 100 points of your credit score and will show up in your report as a negative activity.
Experts suggest that a home foreclosure can knock off a whooping 200 points from your credit score and filing for bankruptcy is even worse. If you are having trouble meeting your repayment obligations, it is a better idea speaking to your loan officer to see if there are available options that pretending the loans don’t exist.
- Closing an account – If you feel the need to close any accounts you are not using at the moment, think again. Any account in good standing whether in use or not is contributing to your overall credit score. When you close these accounts, you are at the same time erasing any good credits this account has produced for you and this can in turn affect your credit worthiness. Also consider that an open account will help improve the length of your credit history, which is also an important factor in your credit score.
Of course, there are cases when closing an account is in order. For instance, if the card or account charges a high annual fee and the benefit of keeping the account is not worth the yearly charges, also if you have problem with overspending and are trying to curtail on your expenses.
As you can see from the points above, some of the habits covered are what we do without knowing the far reaching consequences financially. If you are guilty of one of more of the habits above, chances are you have less than a stellar credit score therefore you need to make some drastic changes if you are to enjoy financial security.