5 Unexpected Things That Can Lower Your Credit Score: Your credit score is a crucial aspect of your financial life, influencing the interest rates you receive on credit cards, loans, and mortgages.
Although it may seem like a simple three-digit number, credit scores are calculated using a variety of factors and can be significantly impacted by seemingly small actions.
The volatility of credit scores means that consumers need to be vigilant and aware of the factors that can lead to sudden drops in their scores.
Among these factors are some lesser-known actions that might catch you off guard. These unexpected events can lower your credit score, making it essential to recognize them and adapt your financial behaviors accordingly.
By understanding how these factors affect your credit score, you can take appropriate measures to improve and protect it.
Key Takeaways
- Credit scores are crucial in determining interest rates for various financial products
- Lesser-known factors can lead to unexpected drops in credit scores
- Awareness and proactive financial behaviors are needed to improve and protect your score
Table of Contents
Understanding Credit Scores and Reports
Components of a Credit Score
Credit scores are an essential part of an individual’s financial profile. It plays a significant role in securing loans, mortgages, and other financial products. A credit score is primarily based on a person’s credit history, compiled in a credit report. The main components of a credit score include:
- Payment history (35%): This refers to the individual’s record of on-time payments and any delinquencies in their credit accounts.
- Credit utilization ratio (30%): This is the balance of revolving credit (such as credit cards) relative to the total credit available.
- Length of credit history (15%): The time since the individual started using credit.
- Types of credit (10%): Mix of credit accounts such as mortgages, auto loans, and credit cards.
- New credit (10%): The number of recent credit inquiries and newly opened credit accounts.
Differences Between FICO and VantageScore
Two popular credit scoring models are FICO and VantageScore. While both models use similar factors to calculate scores, they have some differences in their weightage and scoring range:
| Factors | FICO | VantageScore |
|---|---|---|
| Payment history | 35% | Extremely influential |
| Credit utilization | 30% | Highly influential |
| Length of history | 15% | Moderately influential |
| Types of credit | 10% | Less influential |
| New credit | 10% | Less influential |
| Scoring range | 300 – 850 | 300 – 850 |
Credit Reporting Agencies Explained
Credit reports are prepared and managed by three main credit bureaus: Equifax, Experian, and TransUnion.
These credit bureaus collect and maintain credit information about individuals from various sources such as lenders, credit card companies, and public records. Credit bureaus generate credit reports that contain information about an individual’s credit history and activities, such as:
- Personal information: name, address, and Social Security number.
- Credit accounts: the types of accounts, credit limits, account balances, and payment history.
- Credit inquiries: a list of lenders or companies that have requested the individual’s credit report.
- Public records: bankruptcies, tax liens, or court judgments.
Each credit bureau may have slightly different information on an individual’s credit report, leading to variations in their credit scores.
It is essential to regularly review credit reports from all three bureaus and ensure that the information is accurate and up-to-date.
This can help avoid any potential issues or inaccuracies affecting an individual’s credit score and financial health.
5 Unexpected Things That Can Lower Your Credit Score
Late Payments and Their Impact
Late payments can significantly affect your credit score. Payment history is one of the most crucial factors in determining your credit score, with a weight of approximately 35% in the calculation. When you miss a debt payment, whether it’s a credit card, loan, or other types of credit account, it gets reported to the credit bureaus, resulting in a negative impact on your credit score.
Consequences of Late Payments:
- 30-59 days late: A moderate impact on your credit score.
- 60-89 days late: A more significant impact on your credit score.
- 90 days late or more: This is considered serious delinquency and could result in a noticeable drop in your credit score.
Credit Utilization and Available Credit
Credit utilization, or the percentage of your available credit that you use, plays a major role in determining your credit score.
High credit utilization can negatively affect your score, while low utilization indicates responsible credit management.
Financial experts typically recommend maintaining a credit utilization rate below 30% to help improve your credit score.
Example of credit utilization calculation:
Let’s say your total credit limit is $10,000, and you have $3,000 in outstanding balances. Your credit utilization rate would be 30% ($3,000 ÷ $10,000 = 0.30, or 30%).
Effects of Closing Credit Accounts
Closing a credit account, such as a credit card, can hurt your credit score in two ways. First, it can reduce your total available credit, increasing your credit utilization rate.
Secondly, it may shorten your credit history, which accounts for about 15% of your credit score calculation.
It’s generally advisable to keep zero-balance credit card accounts open to avoid these negative effects.
New Credit Inquiries and Their Consequences
When you apply for new credit, such as a loan or credit card, lenders may perform a hard inquiry on your credit report.
These inquiries have a temporary negative effect on your credit score. While the impact of a single inquiry is usually minor, multiple hard inquiries within a short period can indicate financial distress and lead to a more significant decrease in your credit score.
To minimize the impact on your credit score, it is essential to strategically apply for new credit only when necessary.
Having Too Many Cards
Possessing many credit cards may not directly lower your credit score, but it can lead to negative consequences. Managing several credit card accounts increases the chances of missing payments, which can negatively impact your credit score.
In addition, high balances across multiple cards can lead to high credit utilization, an unfavorable situation for lenders and credit bureaus. It is crucial to maintain a balanced and manageable number of credit accounts focus on timely payments and maintain low credit utilization.
Financial Behaviors and Credit Scores
Credit scores are influenced by several financial behaviors, some of which might be unexpected. In this section, we will explore the impacts of certain habits on your credit score, including paying bills on time, having high balances on revolving credit, co-signing loans, and debt settlement.
Importance of Paying Bills on Time
Your payment history is a critical factor in determining your credit score. Every late payment you make can lead to a drop in your score. Creditors want to see a pattern of timely bill payments.
When you pay all your bills on time, it demonstrates your reliability as a borrower. A consistent payment history can contribute to a higher credit score.
In contrast, late or missed payments can tarnish your record, leading to a lower credit score. This applies not only to credit card bills but also to utilities, phone bills, and even mortgage or personal loans.
An excellent payment history also increases your chances of availing better loan terms in the future.
High Balances and Revolving Credit
Another critical factor impacting your credit score is your credit utilization. High balances, especially on revolving credit accounts like credit cards, can hurt your score.
It is essential to maintain your balance below 30% of your credit limit across all your cards. Consistently reaching or exceeding your credit limit signals a potential financial risk to potential lenders.
Consequently, keeping low balances and managing the usage of your credit cards can help maintain or improve your credit score.
Co-Signing Loans and Associated Risks
Co-signing on a loan might seem like an act of kindness, but it comes with risks that can impact your credit score. When you co-sign a loan, your credit score becomes tied to the primary borrower’s behavior.
If the borrower fails to make timely payments, it will negatively affect your credit score as well. Furthermore, the additional debt will increase your credit utilization, making it seem like you have too much debt.
It is crucial to be aware of these risks and consider the potential consequences before co-signing a loan.
Debt Settlement and Loan Defaulting
Debt settlement involves negotiating with your creditors to settle a debt for less than the outstanding balance. While this may seem like an attractive option, the process can carry severe consequences for your credit score.
Defaulting on a loan similarly hurts your credit score. Regardless of the reason, defaulting on a loan will appear on your credit report and usually leads to a significant decrease in your score. Bankruptcies, liens, and foreclosures stemming from defaulted loans can also leave a lasting negative mark on your credit history.
Ensuring that you fulfill all your debt obligations on time and considering other alternatives before opting for debt settlement can protect your credit rating.
Lesser-Known Factors Affecting Credit Score
Library Fines and Parking Tickets
It may come as a surprise to some, but overdue library books and unpaid parking tickets can hurt your credit score. When left unresolved, these minor issues might be turned over to collection agencies, and collection actions appear on your credit report leading to a lower personal credit score.
To avoid such consequences, one should be diligent in resolving these seemingly insignificant debts.
Effects of Unpaid Utilities and Rent
Missing utility payments or rent can also negatively affect your credit score. While timely payments in these categories are not directly reported to the credit bureaus, unpaid balances can be sent to collections, ultimately showing up on your credit report.
Thus, it is essential to maintain communication with utility companies and landlords to ensure that any missed payments are quickly resolved before they impact the credit score.
The Impact of Medical Bills
Unpaid medical bills can have a significant effect on personal credit scores as well. Health insurance may not always cover the entire cost of medical treatments, and the remaining balance can go to collections if left unpaid.
To avoid this, individuals should stay informed about their medical expenses and communicate with healthcare providers to create payment arrangements or apply for financial assistance if needed.
Identity Theft and Credit Score Damage
Identity theft is another factor that can damage your credit score. When an individual’s personal information is stolen and used to access credit or loans without their knowledge, the unpaid debts and unauthorized transactions appear on the victim’s credit report.
In such cases, it is essential to monitor credit reports frequently and take immediate action when identity theft is suspected to minimize any credit score problems.
In summary, maintaining a healthy credit score involves more than just paying bills on time and managing credit utilization. Lesser-known factors like library fines, parking tickets, unpaid utilities, rent, medical bills, and identity theft can also significantly impact one’s credit score.
By staying vigilant and addressing these issues promptly, individuals can maintain their credit health and avoid any surprises.
Improving and Protecting Your Credit
Strategies for Managing Credit Utilization
One of the essential factors affecting your credit score is credit utilization. This refers to the proportion of your available credit limits that you’re currently using.
A good guideline is to keep your credit utilization below 30% of your total credit limit to achieve this, consider strategies like paying down balances, requesting a credit limit increase, or using multiple credit cards with lower balances.
The Role of Credit Counseling
Credit counseling can play a significant role in improving and protecting your credit. A credit counselor can help you develop a personalized debt management plan and offer advice on budgeting, financial management, and debt repayment.
This assistance can be invaluable in addressing missed payments, collections, or other issues that might be hurting your credit score.
Monitoring for Errors and Disputes
It is crucial to regularly monitor your credit report for any errors or discrepancies. Inaccurate information on your credit report can significantly lower your credit score.
In case of any errors, you can file a dispute with the respective credit bureau to get the issue resolved. Regularly reviewing your credit report also helps in identifying potential fraud or identity theft, allowing you to take action before it causes severe damage to your credit.
Building a Positive Credit History
A strong credit history is vital for maintaining a good credit score. To build a positive credit history, focus on the following strategies:
- Paying bills on time: Your payment history makes up a significant portion of your credit score. Consistently paying your bills on time will have a positive impact on your credit.
- Maintaining a diverse credit mix: Demonstrating the ability to handle a mix of different types of credit, such as credit cards, loans, and mortgages, can improve your credit score. However, avoid opening too many new accounts at once, as this may signal financial stress and can temporarily lower your score.
- Keeping older accounts open: The length of your credit history is another important factor in your credit score. Keeping older accounts active, even if they’re not being used, can help increase the age of your credit history.
By following these strategies, you can build a strong credit profile and protect your credit score from unexpected declines.
Additional Tips on Credit Scores
Maintaining a healthy credit score requires a disciplined and consistent approach. Here are some additional tips to help ensure your credit score remains as high as possible:
- Timely Payments: Always make at least the minimum payment on your credit accounts before the deadline. Late payments could hurt your credit score, especially if they become a regular occurrence.
- Credit Utilization Ratio: Keep your credit utilization ratio below 30%, which means using only 30% of your available credit limit on credit cards or other revolving credit lines. This can be achieved by reducing your credit card balances or requesting an increase in your credit limit. High credit utilization can lower your credit score.
- Credit Mix: A diverse mix of credit accounts (e.g., mortgage, student loans, auto loans, credit cards) can positively influence your credit score. Lenders prefer borrowers who can manage different types of credit responsibly.
- Old Credit Accounts: Avoid closing old, inactive credit accounts, especially those with a long payment history and low or zero balance. These accounts can improve your credit history length and increase your available credit, which ultimately helps your credit score.
- New Credit Inquiries: Apply for new credit cautiously, as too many hard inquiries within a short period can indicate higher risk to potential lenders, which may lower your credit score. Aim to space out credit applications and consider utilizing soft inquiries when checking your credit.
By following these tips and regularly monitoring your credit report, you can maintain a strong credit score and increase your chances of securing favorable interest rates on loans and credit cards.
FAQ
What are the 5 factors that affect a credit score?
Payment history, credit utilization, length of credit history, credit mix, and new credit applications.
What brings credit score down the most?
Late payments and high credit card balances can significantly lower your credit score.
What are 5 things not in your credit score?
Bank account balances, income, race/ethnicity, religion, and marital status.
What would cause my credit score to drop 5 points?
Missing a payment on your credit card.
What factors contribute to a decrease in credit score even with timely payments?
Even if you make your payments on time, other factors can negatively affect your credit score. These include high credit utilization, maintaining a large balance on your credit cards, and taking on too much debt. Closing old credit accounts may also lead to a decrease in your credit score, as it shortens the average age of your credit history.
Which actions might cause a credit score to drop unexpectedly?
Unexpected drops in credit score can often result from mistakes or erroneous information on your credit report, such as late or missed payments that you did not make. Additionally, applying for multiple lines of credit in a short period or opening new accounts can lead to a temporary dip in your credit score.
What are the main elements that have the greatest negative impact on your credit score?
The most significant factors that can negatively impact your credit score include late or missed payments, high credit utilization, defaulting on a loan, and having an excessive number of inquiries on your credit report in a short period. Also, filing for bankruptcy or having an account sent to collections will substantially harm your credit score.
How can someone improve their credit score proactively?
Proactively improving your credit score requires consistent effort and good financial habits. Some effective strategies include making timely payments, keeping your credit utilization low, maintaining a diverse account mix, avoiding taking on too much new debt, and periodically reviewing and correcting any errors in your credit report.
Can certain types of inquiries or reports have a detrimental effect on credit scores?
Yes, certain types of inquiries or reports can negatively impact your credit score. Hard inquiries, which occur when you apply for a loan or a line of credit, can cause a minor, temporary drop in your credit score. However, soft inquiries, such as when you check your credit, do not affect your credit score.
Are there any common misconceptions about what is not included in a credit score?
Some common misconceptions about credit scores include the belief that income, job status, and age are factors that directly influence the score. However, these factors do not play a direct role in determining your credit score. Additionally, while your payment history for utility bills and rent may not typically be included in your credit score calculation, recent changes in credit reporting practices may lead to their inclusion in some cases.
How do I dispute an error on my credit report?
Contact the credit reporting agency and provide documentation to support your dispute.
