When you seek for a loan to mortgage bankers or auto dealerships, the lenders give the approval after calculating the risk of lending money to you. Your credit score is the metric that helps them to determine the risk. Based on the credit rating, they will determine how financially responsible you are and how much they will lend you at what interest rate.
So, you must have already understood how important it is to maintain a good credit score. However, some things can hugely affect your credit score. Let’s take a look at factors so that you can avoid them at any cost:
Paying Bills Late or Not Paying at All
What’s the first thing a lender will want to know about your credit? The history of making payments. It makes up almost a third of your score. So, don’t fail to pay the bills on time as it will badly hit the score.
What’s more devastating for your credit score is not paying bills at all. The missed payments go to the collections that will remain on your credit report for seven years, irrespective of whether you have paid them later or not.
Bankruptcy and Foreclosure
These two things are just catastrophic for your credit score. They can quickly knock 100 points off the score! You should seek consumer credit counseling or other alternatives before filing for bankruptcy.
If you are behind on your mortgage payments, the lender will foreclose on your home. So, slipping up on payments will not only hurt your credit score but also cost you the house and make it harder to get approved for future mortgage loans.
Spending to the Maximum Credit Limit
The debt utilization ratio, which is the amount of the available credit you are using, plays a prominent role in calculating the risk of your credit score. The score will take a hit if your credit card balance exceeds 50% of your credit limit. It’s recommended to keep the debt between ten to thirty percent.
For example, you should not have more than $6,000 on your card if the limit is $20,000.
Closing Credit Cards and Applying for New Cards Often
Closing a card means less amount of credit in your accounts. So, it will be wise to discontinue the newer ones if you need to terminate a credit card because the older ones have longer credit histories.
Similarly, applying for new credit cards often also affect your credit score. An official inquiry will be made against every application for a credit card. Multiple investigations are likely to imply that there are problems with the credit history.
Co-Signing a Loan
Co-signing means shouldering the responsibility for another person. Co-signing a loan for someone else will show up on your credit report, which means that any missed payments down the road will affect your score negatively.
Avoid all the things that have been mentioned above if you want to keep a clean record and maintain a good credit score.