Highlights:
- Even one late payment can cause credit scores to drop
- Carrying high balances may also impact credit scores
- Closing a credit card account may impact your debt to credit utilization ratio
If you’ve tried to make a large purchase such as a home or a vehicle, or even open a credit card account, you likely know the important role your credit scores play in lending decisions. When you apply for credit, your credit scores and the information in your credit reports, along with other criteria, are used by lenders and creditors as part of their decision-making process when evaluating your application.
It might be easier than you think to negatively impact your credit scores. Here are five ways that could happen:
1. Making a late payment
Your payment history on loan and credit accounts can playa prominent role in calculating credit scores; depending on the scoring model used, even one late payment on a credit card account or loan can result in a decrease. In addition, late payments remain on your Equifax credit report for seven years. It’s always best to pay your bills on time, every time.
2. Having a high debt to credit utilization ratio
Your debt to credit utilization ratio is another factor used to calculate your credit scores. That ratio is how much of your available credit you’re using compared to the total amount available to you. Lenders and creditors generally prefer to see a lower debt to credit ratio (below 30 percent). Opening new accounts solely to reduce your debt to credit ratio generally isn’t a good idea. That may impact your credit scores in two ways: the hard inquiries resulting from those applications (more about hard inquiries below), and the new accounts themselves may lower the average age of your credit accounts. It's best to only apply for the credit you need, when you need it.
3. Applying for a lot of credit at once
When a lender or creditor accesses your credit reports in response to an application for credit, it results in a “hard inquiry.” Hard inquiries can impact credit scores. Applying for multiple credit accounts in a short time may impact credit scores andcause lenders to view you as a higher-risk borrower. In addition, some credit scoring models maytake your recent credit activity into account.
There’s one caveat: if you are shopping for an auto or mortgage loan or a new utility provider, the multiple inquiries for that purpose are generally counted as one inquiry for a given period of time (typically 14 to 45 days, although it may vary depending on the credit scoring model). This allows you to check different lenders and find out the best loan terms for you. It’s important to know that this exception generally doesn’t apply to other types of loans, such as credit cards.
4. Closing a credit card account
It may be tempting to close a credit card account that’s paid in full, but doing so may affect credit scores. Besides impacting your debt to credit utilization ratio, closing the credit card account may also affect the mix of credit accounts on your credit reports. In general, lenders and creditors like to see that you’ve been able to properly handle different types of credit accounts over a period of time. Closing a credit card account you’ve had for a while could alsoshorten the length of your credit history, which may impact credit scores.
5. Stopping your credit-related activities for an extended period
If you haven't used your credit accounts for months, and your lenders and creditors have reported no new information to credit bureaus,it may make it more difficult for lenders and creditors to evaluate your application for credit or services.
Also, after a certain period of time, which varies depending on the lender or creditor’s policies, your credit card account may be considered “inactive” and closed by the lender. That, in turn, may impact credit scores in the same ways as if you had closed the account. If you want to keep the account active, you may want to consider using it – responsibly – every few months, if only for small purchases, or putting a small recurring charge on the card.
Regularly checking your credit reports is one way to keep track of your credit accounts and know what information is being reported by your lenders and creditors – and factored into your credit scores. You’re entitled to a free copy of your credit reports every 12 months from each of the three nationwide credit bureaus by visiting www.annualcreditreport.com. You can also create a myEquifax accountto get sixfree Equifax credit reports each year. In addition, you can click “Get my free credit score” on your myEquifax dashboard to enroll in Equifax Core Credit™ for a free monthly Equifax credit report and a free monthly VantageScore® 3.0 credit score, based on Equifax data. A VantageScore is one of many types of credit scores.
FAQs
Payment history, debt-to-credit ratio, length of credit history, new credit, and the amount of credit you have all play a role in your credit report and credit score.
What are the 5 main factors that affect your credit score? ›
Payment history, debt-to-credit ratio, length of credit history, new credit, and the amount of credit you have all play a role in your credit report and credit score.
What 5 things is your credit score based on? ›
The primary factors that affect your credit score include payment history, the amount of debt you owe, how long you've been using credit, new or recent credit, and types of credit used. Each factor is weighted differently in your score.
What are 3 ways you can hurt your credit score? ›
Payment History: 35%
Making debt payments on time every month benefits your credit scores more than any other single factor—and just one payment made 30 days late can do significant harm to your scores. An account sent to collections, a foreclosure or a bankruptcy can have even deeper, longer-lasting consequences.
What are the 5 credit scores? ›
Credit scores typically range from 300 to 850. Within that range, scores can usually be placed into one of five categories: poor, fair, good, very good and excellent.
What could negatively impact your credit score? ›
Late or missed payments. Collection accounts. Account balances are too high. The balance you have on revolving accounts, such as credit cards, is too close to the credit limit.
What are 3 things a credit score ignores? ›
FICO® Scores consider a wide range of information on your credit report. However, they do not consider: Your race, color, religion, national origin, sex and marital status.
What causes credit scores to go down? ›
Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts (which may shorten your length of credit history overall), or applying for new credit accounts.
Which are major factors of credit risk? ›
Key Takeaways
- Credit risk is the potential for a lender to lose money when they provide funds to a borrower. ...
- Consumer credit risk can be measured by the five Cs: credit history, capacity to repay, capital, the loan's conditions, and associated collateral.
Character, capacity, capital, collateral and conditions are the 5 C's of credit. Lenders may look at the 5 C's when considering credit applications. Understanding the 5 C's could help you boost your creditworthiness, making it easier to qualify for the credit you apply for.
Standards may differ from lender to lender, but there are four core components — the four C's — that lenders will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.
What factors would make your credit score go up down? ›
Common things that improve or lower credit scores include payment history, credit utilization (the amount of credit you use), credit mix, and your length of credit history. Another thing that can improve or lower your credit score is whether you've opened new credit recently.
What are 10 things you could do to hurt or even destroy your credit? ›
10 Things That Can Hurt Your Credit Score
- Getting a new cell phone. ...
- Not paying your parking tickets. ...
- Using a business credit card. ...
- Asking for a credit limit increase. ...
- Closing an unused credit card. ...
- Not using your credit cards. ...
- Using a debit card to rent a car. ...
- Opening an account at a new financial institution.
Knowing how credit scores are calculated can help you boost your standing if you pay close attention to these five criteria:
- Payment history.
- Amounts owed.
- Length of credit history.
- New credit.
- Credit mix.
Your score falls within the range of scores, from 740 to 799, that is considered Very Good. A 777 FICO® Score is above the average credit score. Consumers in this range may qualify for better interest rates from lenders. 25% of all consumers have FICO® Scores in the Very Good range.
Is a 900 credit score possible? ›
Highlights: While older models of credit scores used to go as high as 900, you can no longer achieve a 900 credit score. The highest score you can receive today is 850. Anything above 800 is considered an excellent credit score.
What is the single worst thing you can do to your credit score? ›
Making a late payment
Even one late payment on a credit card account or loan can result in a credit score decrease, depending on the scoring model used. In addition, late payments remain on your Equifax credit report for seven years. It's always best to pay your bills on time, every time.
What things are bad for credit scores? ›
Four big bad credit score killers
- Paying late. ...
- Defaulting. ...
- County Court Judgments (CCJ) ...
- Not being on the electoral roll. ...
- Minimum payments. ...
- Taking out cash on credit cards. ...
- Applying for credit over and over and over… ...
- Old accounts with the wrong address.
Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.
What are 3 actions that can harm your credit? ›
Even one missed payment, carrying high balances or co-signing a loan are some of the things that can hurt your credit. Erin El Issa writes data-driven studies about personal finance, credit cards, travel, investing, banking and student loans.
Payment history is the most important factor in maintaining a higher credit score as it accounts for 35% of your FICO Score. FICO considers your payment history as the leading predictor of whether you'll pay future debt on time.
What are the three most common credit mistakes? ›
Not checking your credit score often enough, missing payments, taking on unnecessary credit and closing credit card accounts are just some of the common credit mistakes you can easily avoid. Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.
What are the 5 factors taken into account when calculating a credit score quizlet? ›
What are the 5 factors taken into account when calculating a credit score? Payment history, amounts owed, length of credit history, new credit, and types of credit. you are being held to a higher standard and are expected to maintain that high score.
What habit lowers your credit score? ›
Making a Late Payment
Every late payment shows up on your credit score and having a history of late payments combined with closed accounts will negatively impact your credit for quite some time. All you have to do to break this habit is make your payments on time.
How can I increase my credit score? ›
If you want to improve your score, there are some things you can do, including:
- Paying your loans on time.
- Not getting too close to your credit limit.
- Having a long credit history.
- Making sure your credit report doesn't have errors.
Factors that impact your credit score
- Payment history (35%) Before a lender can feel comfortable about letting you borrow money, they're going to want to know whether you have paid other lenders back on time. ...
- Amounts owed (30%) ...
- Credit history length (15%) ...
- New credit applications (10%) ...
- Credit mix (10%)
