The creditworthiness of an individual is evaluated using that individual’s credit score. A credit score is usually represented by a three-digit number derived from an average analysis of a person’s credit report information. Credit scores are used by lenders to estimate the potential risk posed by lending money to their customers.
Now, a good example of a credit score number is the 650 credit score. Let’s use the US as an example. In the US, there are two major credit score estimators; VantageScore and FICO. Both have credit scores ranging from 300-850. Again, both consider 650 credit score as “fair”. This means that issues have been found with an individuals creditworthiness. So, a person with such a credit score is not at a good position to borrow a loan or acquire a credit card with the best offers/rates.
Generally, if you have a higher credit score, the less risk lenders view you thus allowing you access to more credit at lower interest rates. A large portion of the UK carry average credit scores when using Equifax’s score range (0 – 700). While in the US, the average is 695 according to FICO.
So what factors can damage our credit score? Below you’ll find a list which details each issue that brings down our scores:
1) A bad payment history
Whether you’re delayed or completely missed committing to a payment, it has an impact on your credit score. So if you make subsequent payments in time, a single missed or delayed payment in the past can have a negative impact on your credit history for up to seven years.
2) Collections
A creditor can sell your unpaid debt to a third party. This typically happens if you have unpaid debt older than 180 days. Once it’s in collections, the credit bureaus will be notified and your credit score will drop significantly.
3) Applying for many credit cards and/or loans
Credit inquiries usually account for 10% of your total credit score. Applying too often can indicate to credit bureaus that you’re having issues financially.
4) Filing Bankruptcy
If you can no longer manage your debt, you may decide to file bankruptcy. Depending on the one you have filed (Chapter 7 or 13), your credit score will be devastated for the next 7 to 10 years.
5) Closing old credit cards
It’s best to keep older credit lines open as a longer credit history improves your score. It’s, in fact, worth 35% of your score. So closing your old credit cards minimizes your history. It also decreases your credit utilization ratio. All these lower your credit score.
6) Maxed out credit cards
Your balance and available credit on your credit card should be in a specific ratio to maintain a good credit history. It’s recommended to keep the balance lower than 30% for a good utilization ratio. It ruins your credit score for some 3 months after which you can expect to recover.
7) Foreclosure
This can cause a 160-point drop in your credit score. This happens when you get behind your mortgage payments. The lender of the mortgage therefore takes possession of your home.
8) Charge-off
Creditors charge off your account when they suppose you aren’t going to pay back your debt. Such an account is now written of by the lender as a loss. This history hurts your credit score and can do so for as long as seven years.
9) Being authorized to use someone else’s “bad” account
This is rather self explanatory. If you become an authorized user of another individual’s account, you inherit that account along with its credit history. If it’s a good one, it impacts positively on yours too. If it’s delinquent, you also suffer the negative consequences on your account.
These are the common issues that can hurt your score to try your best to avoid these occurrences and stay on track.