Credit Scores: What Are the Factors That Can Hurt It?
Image Credit: @rupixen via Unsplash
We all should aspire for a good credit score. As discussed previously, you want it at 720 and above and never below 580. Having said that, keep in mind that your credit score is fluid — meaning it changes continuously depending on your actions. Just as there are ways to increase it (e.g., by paying off debt), there are also factors that can easily hurt it. These factors are as follows:
Your payment history determines 35% of your credit score, which means an excellent payment history (on-time and in-full payments) translates to a higher score. Contrarily, serious payment issues such as charge-offs, bankruptcy, tax liens, or foreclosures will devastate your credit score. Avoid late payments and pay your debt off in full whenever possible. That holds true for all your bills, including those for your utilities and subscriptions.
Credit utilization refers to the amount of credit you have used regarding your credit limit, and accounts for 30% of your score, according to a post by Nerd Wallet. Ideally, you should keep your credit utilization at under 30%, as anything over will adversely affect your credit score number. So if your credit limit is $10,000, you can keep your credit utilization at under 30% by keeping your credit spending at under $3,000.
Credit history makes up 15% of your credit score and credit issuers tend to view longer credit histories positively. This is because creditors can glean from it vital information about your payment history, as well as your general attitude towards paying off debt. Obviously, building your credit history will take time, but as you do so, make sure it always reflects positively on you with on-time and consistent payments.
Ironically, getting more credit can actually build up your score. That’s because credit mix counts for 10% of your credit score. In this case, consider getting a type of credit you don’t have. Try to have at least one installment account (where you make equal payments for a specified time) and one revolving credit (where you can choose how much you’ll pay, like in a credit card). Just make sure you can handle the additional responsibility that comes with this new line of credit.
Your credit score is computed based on information collated by the three reporting agencies: Equifax, Experian, and TransUnion. But like all of us, they too make mistakes. A Petal Card blog about the factors that can affect your credit score notes that these agencies occasionally make mistakes in their reports, which can have a negative effect on your number. That’s because errors can affect all the factors discussed above. Some of these errors are unreported or under-reported payments and incorrect account information. Needless to say, you have to be vigilant. Request a copy of your credit report, check it thoroughly, and dispute inaccuracies, if any. If you don’t, you could face a lot of headaches further down the line when it comes to applying for any type of loan.
Now that you know the factors that can hurt your credit score, you can be more mindful and avoid them — but don’t stop there. Aim to increase your credit score by following our article entitled ‘4 Simple Tips to Raise Your Credit Score’. Pay your bills on time, limit credit spending, be judicious with opening new credit, and report errors, and you’ll be sure to have an excellent credit score in no time.