Understanding which credit behaviors affect your credit score is an important step toward improving your creditworthiness and planning for your future. Once you know what will cause your credit score to drop, you can make changes to become a better borrower.
Lenders use your three-digit credit score to measure your level of risk and evaluate your application for credit. The higher your score, the more likely it appears that you will repay your debt quickly. Less risky consumers are more likely to get the best terms and interest rates.
Credit reporting agencies (CRAs) assess your information and assign you a credit score. Your score will vary with each individual scoring model, but these five things are usually considered:
1. Your payment history. Approximately 35 percent of your credit score is based on your payment history. The frequency of late payments, the length of time past due, and the amount of missed payments owed will have a significant impact on your credit score.
2. The amount you owe. Roughly 30 percent of your credit score is based on amounts owed, also referred to as your credit utilization ratio. The number of accounts you have with balances, and the amounts of those balances, are factored into your credit score.
3. The length of your credit history. The amount of time your credit accounts have been established determines 5 percent to 7 percent of your credit score. A long history of good credit behavior provides lenders with more evidence of your creditworthiness.
4. The amount of new credit you have. Between 10 percent and 12 percent of your credit score is based on your new credit behavior. That includes new accounts, recent requests for credit, and the total balance of recently opened accounts.
5. The types of credit you use. Your credit score will reflect whether you have a history of handling diverse kinds of credit successfully. Approximately 15 percent of your credit score is based on the types of credit you use, such as department store charge cards, student or auto loans, and mortgages.
What can cause your credit score to drop?
Once you know how your credit score is calculated, you can start to assess which of your behaviors may be damaging your creditworthiness. There are no quick fixes for a poor credit score, but there are key habits you should avoid if you want to keep yours from dropping.
These five behaviors could lower your score:
6. Missing your payments. Of all the information in your credit report, your payment history has the strongest effect on your creditworthiness. For that reason, missing payments should be avoided at all costs. Even one late payment can damage your credit score. If you have a history of making late payments or have accounts in collections, your credit score will be lower than it would be if you paid on time and had no collections.
7. Having an account in collections. If you continue to miss payments, creditors may send your account to a collection agency. Bear in mind that high credit scores are likely to lose more points than lower ones as a result of a collection.
8. Using too much of your available credit. Your credit utilization, or ratio of debt to available credit, should be kept as low as possible. A balance of more than 30 percent on your credit accounts could cause lenders to view you less favorably.
9. Opening too many lines of credit at once. Having a diverse credit history is good, but taking out lots of credit at one time is not. Each time you apply for a new line of credit, a hard inquiry will appear on your credit report, and this can lower your score. (There are some exceptions to that rule, however. If you are shopping for an auto loan or mortgage, for example, all inquiries within a 30 day period count as a single inquiry.)
In addition, opening multiple lines of credit at once could decrease your score because every time you open a new credit account it shortens your average account age.
10. Closing an account. Closing an account could change your credit utilization ratio by lowering the combined credit limit on all of your accounts, which could in turn negatively affect your creditworthiness. If you close an old account, it could also negatively impact your average account age and potentially lower your score.
How can you help improve your credit score and creditworthiness?
There are strategies you can use to improve your creditworthiness over time. Proving yourself to lenders could take some effort, but it is likely to pay off for you in the long run. Make on-time payments each month, maintain a credit utilization ratio of 30 percent or less, and be mindful when opening new credit accounts.
Also, be sure to check your credit report regularly and correct any mistakes. Erroneous information could negatively impact your score, and it could also be a red flag for identity theft.
Diane Moogalian is vice president of operations for Equifax Personal Solutions. Prior to joining Equifax in 2007, Diane held several strategic roles with leading financial services companies. Diane graduated from the University of Richmond with a Bachelor of Science in Business Administration (Marketing and Economics) and earned a Certificate in International Business from Virginia Commonwealth University.
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