Having a good credit score is extremely important nowadays, mainly because most of our financial lives are dependent on the relationships that we have with banks. Building up your credit score can take several years, during which banks will see that you can be trusted with larger credits, for longer periods of time.
Unfortunately, as difficult as it is to improve your credit score up to the point where a bank will never turn down your request to take out a loan or a line of credit, it can be damaged irreparably in one a few months.
Below, we’ll take a look at the main things that will have a negative impact on your credit score, along with what you should do in order to avoid having any issues.
Your long-term payment history is extremely important
The first thing that all creditors check when they look at your financial records is your payment history. Missing any of the monthly payments on your loans will have a detrimental effect on your credit score. This is because all lenders are interested in working with individuals that they can trust to pay back their debts on time.
Generally speaking missing monthly payments or having unpaid debts in your financial history can put a serious dent in your credit score and may determine creditors to not give you any further loans.
Your payment history can make up around 30-35% of your total credit score. This means that having unpaid debts or not making your monthly payments on time are some of the most damaging things when it comes to your credit score.
Your credit utilization ratio has a huge impact on your credit score
Lenders will also look at your credit utilization ratio. They are not interested in how many credit cards you have, or what their limits are. The only thing that matters here is what percentage of your total amount of credit you are currently using.
For example, if you have two credit cards that each have a $1000 limit on them, the lenders won’t be interested in the total amount of credit that you have, only on how much of it you are constantly using. Having one or two credit cards that you never use will never damage your credit score, however, capping them off will.
In most cases, anything over a 30% credit utilization ratio will signal lenders that you are dependent on your credit, and will damage your overall score.
The best thing to do here in order to avoid this issue is to close as many accounts as possible and to only use your credit cards once every 2-3 months. Furthermore, the faster that you pay off the credit cards, the better. Overall, even if you occasionally use up to 50% of your credit ratio, lenders will notice that you’ve paid off your debts immediately after.
Having a short credit history length may discourage creditors
Your credit history length is your financial track record. The longer it is, the more information lenders will have. This will give them a better appreciation of what risks they can take when considering how much money they can lend you.
On the other hand, having a very short credit history will give them too little information to efficiently assess your financial behavior. This will result in lenders limiting the amount of money that they allow you to borrow at any given time.
The only way to effectively solve this issue is to borrow money and to pay it back on time. Over the course of a few years, your history will become larger and lenders will see that they can give you more money with minimal risks.
Having a very simple credit mix will lower your credit score
Your credit score is comprised of all the loans that you have ever take out. This includes all installment payments, mortgages, payday advances, credit cards, and other types of loans. Individuals who have a very simple credit mix will have a lower score due to the fact that lenders will estimate that they are unable to support a larger number of simultaneous monthly payments. The credit mix affects around 10-15% of your total credit score.
Fixing this issue requires that you access a larger number of credits and keep them in check. Take out a loan, and make the monthly payments on time, get a credit card and use it sparingly, etc. The more financial services that you use at the same time, the better your credit mix will be, provided that you are not late with your payments.
Too many credit accounts opened in a short amount of time should be avoided
Lastly, any new credit that you get can have a negative impact on your score. Lenders will check to see if you open a large number of credit accounts in a short period of time. If the number is too great, it may be considered that lending you money involves too big of a risk and your credit score will drop with approx. 10%.