When you are thinking about any kind of credit, whether it is a personal loan, business loan, a mortgage or a credit card application the financial institution involved will want to look at your credit score – and you might find yourself unpleasantly surprised.
While there are many reasons financial institutions decline credit applications, a poor credit score is one of the most common, and you could be damaging your score without even realizing.
It’s easy enough to check your score nowadays with plenty of free credit reports to choose from, but actually improving it, when you can’t get credit, can be a very tricky challenge – it becomes a vicious circle.
5 Things that can drop your Credit Score
For this post, we turned to the team behind Crunch and asked them the things we may be doing to hurt our credit score. Check out the list of their top five answers:
1. Late or missing payments
If you are regularly late paying your current creditors back, this will hurt your credit score. Your payment history makes up about 35% of your credit score, so it’s important to pay on time and keep your payments up-to-date.
Worse still is if you miss a payment and fail to pay altogether. Every month you miss paying will go against you on your credit score, and if your creditor writes off the debt it will have an incredibly negative impact on your score as that debt will become the default and handed over to the collections agencies. If that happens, you will find it incredibly difficult and time-consuming to recover your score.
2. Filing for bankruptcy or county court judgements
While it may seem like a way out of your financial situation bankruptcy will completely devastate your credit score and will be on your records for the next seven years so you should give serious consideration to other options for resolving a credit problem before choosing to go down the bankruptcy route.
If you have ever refused to pay a bill and it has ended up in front of the courts, it will go against your credit score. County court judgements are always seen as a negative, and if the debt still remains unpaid, that’s an even worse situation for your future credit status. Always make sure to pay all of your bills on time.
3. High credit card levels
If you owe a lot of money on your credit cards or have maxed them out, this will go against you on your credit score. The nearer you are to your limit of available credit, the worse your score will be. It’s always best to stay below 50% of the available credit to avoid having a negative score. If your credit cards are maxed out and you are using 100% of your credit limit that is the worst scenario for your credit score. Using credit cards effectively can help you improve your poor credit score.
4. Closing down old accounts
While it may seem to make sense to close down old credit accounts as soon as they have been paid off this can actually worsen your score. One of the positives on your credit score is the length of time you have had credit for. If you close down all your old accounts, it looks like you haven’t got a very long credit history which can go against you. You can keep accounts open without using the credit that’s on them.
5. Applying for lots of credit cards or loans
Every time you make an application for a credit card or loan it is recorded on your credit report – if you apply for lots of credit in a short space of time, this will go against you and will make your score drop.
Many financial institutions offer the opportunity to check your eligibility before you apply and without affecting your credit rating so if you are just looking to see what you could get, do it this way rather than actually keep applying for loans and credit lines. If you apply and get refused that will have an even more negative impact on your credit score so think carefully before trying to increase your credit.
There are many things which can affect your credit score, but these are just the top five that you might be doing without realizing it. If you are hoping to increase your credit score, then the first step is to contact all of the credit reference agencies to see what your score is now and to make sure all of the information recorded against you is correct.
Once you know what your score is, and which behaviors to avoid so that it doesn’t go down, you can start working on building it up so that you can enjoy a financially secure future, whatever your plans might be.
Credit scores aren’t the only criteria which banks and other places use to assess eligibility, but they are one of the main ones.