Thursday, 12 September 2019

7 Factors Affecting Your Credit Score To Dropped

In this article, I am going to be sharing with you the most common reasons why your credit score might drop. For me, it's just like a matter of asking yourself what changed on your credit report. One of these 7 things had to have happened. It could be a lot of different things also, but these are the 7 most major reasons and the most common reason why your credit score changes.

1. Late Payment

If your bill is over 30 days late, then you are definitely going to see am impact on your credit score, because that late payment is going to get reported to the credit bureaus, and then they are going to document that on your credit report. A lot of people don't, it's not that they don't necessarily know that late payment is a bad thing. People know that they should be paying on time, you get a due date you know that you are supposed to do this thing by the deadline. But I think the big issue here is that a lot of people don't know exactly what the consequences are for making a late payment, and people don't understand that how late you are, actually does matter. If you are a day late, 2 days late, 3 days late, it's not a big deal usually they will forgive that, but if you are more than 30 days late then that is when it actually starts to hurt you and you will see the bump on your score when it drops down.

It's important for you to pay attention to making sure that all of your payments are on time and that if you do forget to make a payment, you pay as soon as you realize that you missed it. Call the company and ask them if they will be willing to forgive that. Your payment history makes up 35% of your credit score. That means the most point in your score comes from you making a payment on time. 

2. Big Purchases

You probably made an expensive purchase. A lot of people don't understand how utilizations works. The next biggest category in your score is worth 30%, that is, utilization or your debt to credit ratio. 

If you have a lot of debt, you own a lot on your credit card, which is bad for your score. The lower your balances are then the higher your score will be, When credit cards first came out they were only used for emergency purposes because people used credit only when they needed to. They weren't, rewards, perks, gas cashback, and flight advantages, didn't exist back then, so when credit cards first came out was very simple, if you are strapped for cash, if you don't have the money, you can use the credit card to make the purchases and pay it back later or slowly over time. That is what people did. If you think about it, that is the original idea of why credit cards exist. If an emergency does happen and you need to use your credit card, but you can't, because you maxed it out, or because you own a lot of money on it. Then you actually can't rely on your credit card as a source of funding when you need it for an emergency.

It's really important that you understand why credit cards exist or what the thinking was why they created them and that you make sure you play by the rules. Keep your balance low at all times and if you do have to make a very expensive purchase just pay it down by the statement closing day.

3. Collections

Any time that you have an account that is unpaid. For the most part, the person who is trying to get that money from you is going to only try to get it from you for so long until they "go alright, you know what? this person is not giving us this money we are tired chasing after them to get it, we are going to hire a collection agency to take care of hunting them down and getting the money that they owe us". Once you have a collection agency chasing after you, that is called going to collections. This means that on your credit report you are going to have a collection that is going to pop up on there. And the more collections you have the worse it is for your score. You really don't want to have a bunch of people out there looking for you, it is really bad for your reputation, it bad for your score, makes it look like you do not pay back what you borrow. This means in the future no lender is going to want to lend you money.

It is going to be hard for you to get approved for anything in the future if you have a lot of collections on your account, so if you have a collection, just pay them off as fast as you can and if you can't afford to pay it off then set up a payment plan with that collection as fast as you can at least call them, get in touch with them and say "hey I can only afford this amount a month, let's put a payment plan together and as long as you are in communication with them then you will be okay". But as long as you keep avoiding them your score is only going to get worse. The reason this hurts your score so much is that it creates something called a "derogatory mark". If you have derogatory marks on your credit report that is when you start to see a pin starts to takes points off your score. You want to be really careful about not having any derogatory marks on your account if possible, and if you see one pop up immediately handle it.

4. Applied For Credit

You have submitted a new application for credit and that makes your credit score drop. There are two different types of inquiries, hard inquiries, and soft inquiries. A hard inquiry is the one that hurts your credit score and this one only happens when you actually submit an application for credit.  Soft inquiries are fine, it is mostly for research-based purposes, sometimes companies will just look and see if they want to think about approving you or how likely will you be to get approved if you did apply. That is just research purposes but when you actually doing it for application purposes that are called a hard inquiry. You do not want a lot of hard inquiries on your account because once you have one hard inquiry on your credit report, it stays on there for 1 full year and you can't get it off to the whole year passes. Slowly as the year approaches, you will see the score starting to go up a little bit because the hard inquiry would have less of an effect as it gets further away in the past. 

5. Lower Credit Limit

Your credit score will drop anytime that your credit limit is lowered. This could be for two different reasons, you asked to close an account and so your credit limit went down, or your credit card issuer reduces the amount of credit that they led you. Either way, it doesn't really matter why, but anytime that the amount of credit that you have decreased, that is going to hurt your score and it's going to be for the same reason as number 2, which was the utilization. If you make an expensive purchase it increases your utilization percentage which is really bad. The same thing happens, when your credit limit drops, you are closer to the amount of money that you owe which means that your utilization percentage is going to increase, that is really bad. Always keep the amount of money that you owe, the balance that you have right now, as far away from the credit limit as possible, if your limit drops and you get closer, that is going to be really bad, you always want to have a low utilization so that it doesn't hurt your score that much.

6. Closed Account

If you ever have an account closed on you or if an account is canceled, the credit card is canceled. That will make your credit score go down. This one is really important because a lot of people think that when they pay off their credit card balance and they are finally free of the debt. That they should close the credit card. That is not the case, you want to leave the card active because it is an account that counts towards your score, every account that you have that is in good standing, that is active, is actually helping your score because it looks like you are able to juggle and manage a lot of different types of accounts and a lot of different types of lenders. But if you close an account or if you cancel a credit card, it is actually going to hurt your score so you will see your point drop, which is something you don't want to do because you can't open it back up and fix it. It is not reversible, you would have to apply again, but sometimes you are not allowed to, you have to wait a certain period of time to apply for a certain credit card again.

If a credit card lender or issuer closes an account on you because you haven't been paying it or because you haven't used it then that is actually bad and it is going to hurt your score as well. It doesn't matter if you close it or if the lender closes it. The point is it's going to have the same effect on your score.

7. Paid Off Loan

If you paid off a loan your score might drop. If you pay off all your student loans that is a good thing, and logically you would think that your score will go up because you show responsible behavior by paying off your debt, but that is not always the case. The things to consider here is that there is a category in your credit score called "mix of credit" or different types of credit that you have and it is really important that you have a good mix. There are two different types of ways that you can mix up your credit, the first one is that you want to have two different types of credit "Installment credit and Revolving credit".

Revolving credit: Are things like credit cards or a line of credit. Things that you will always have access to that money even when you pay it back and your balance is zero, you can use it again right away. 

Installment loan: This is something that they lend you a very clear certain specific amount of money and you pay it off slowly over time until it is zero and then it is done. And you don't actually use it again or touch them again, you pay it off and you are done. Now, if you have a loan and it is an installment loan and you don't have any other installment loans, that is the only one, for example, student loan or a personal loan, and then you pay it off, you don't have any more installment loan, you don't have a mix of credit, you only have revolving credit left which are your credit cards. That is why it is going to hurt your score because the more mix, the more variety in your cards and types of account that you have, the better, and if you don't have a good mix then that is when it hurt.

That is the important thing to know. If you have only one installment loan and you paid it off, and you don't have any more installment loans, you are going to see a little bit of a drop in your score.


That is not all the reason that exists, but it's the top 7 that I pick because they are most the common reasons that I have seen and know of

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