Credit score, also known as FICO score, is a widely accepted standard to assess the financial eligibility of each individual to acquire new line of credit or to negotiate lower interest rates on a loan. The lower the credit score, the less likely you are to be found eligible for a credit extension or for negotiating new credit.
Here are 10 ways to lower your credit score:
1. Missing out credit card payments
Make one late payment won’t have an immediate effect on your credit score. It will definitely incur late fees and higher interest rates on your next credit card bill, but you need more than one missed out payment to lower your credit score. Assuming that your current credit score is 810, it can plunge down to 690 if you miss out a 30-day payment cycle. A 120 point drop in FICO score makes credit significantly more expensive and much harder to obtain because, in effect, you fall from excellent score (720-850 FICO) to average score (675-699 FICO). This means that you may qualify for most loans, but lenders won’t offer you the best possible terms.
2. Maxing out credit cards
Credit utilization measures how much of your available credit you are using each month. credit utilization is zero or less than 10 percent of credit limit. By maxing out your credit cards, the credit utilization rate increases, lowering your credit score.
3. Closing a credit card
Similarly like maxing out your cards, if close a credit card, your credit utilization increases. To better understand this, assume that you have two credit cards with $700 limit to which you charge $350 and $0 respectively. Your current credit utilization is 25%. If you cancel the second card, but you keep on spending the same amount of money, your credit utilization will become 50%. Automatically, you are a high-risk borrower because you use 50% of your available credit each month and lenders cannot trust you for additional line of credit.
4. Having too many credit cards
Owning too many credit cards can lower your credit score because lenders do not trust that you will be able to meet your financial obligations by using all that credit that is available to you. Besides, if your mailbox is getting full of new credit offers, lenders consider that you keep on applying for new loans because you are possibly facing financial difficulties and you are accumulating debt.
5. Accumulating fines
By accumulating unpaid fines you can severely hurt your credit score. Nowadays, outstanding fines are undertaken by collection agencies that have the ability to lower your credit rating if you don’t pay up. If a collection agency reports you for not being able to pay $30 overdue library fees or $75 parking ticket, your credit rating can plunge by 100 points or more.
6. Applying for a car loan
Usually, to find the best deal for a new car you shop around to many different businesses. However, looking for the most competitive rate for a car loan shows as multiple inquiries appear on your credit report and can lower your credit score.
7. Refinancing frequently
One key factor that determines your credit rating is debt to income ratio that measures the amount of your debt compared to your income. Lenders consider this ratio in order to decide whether you are eligible for new or extended credit. Also, it is important to consider that approximately 5% to 10% of your credit score is determined by the amount of new debt incurred. If you refinance frequently, you actually accumulate more debt and although you may reduce your monthly payments, you also lower your credit score.
8. Having your home foreclosed
If you are getting behind on your mortgage payments, you may have to let your property go into foreclosure. For instance, if the underlying loan on your property is $210,000, but the generated funds from a short sale are $150,000, your lenders have the right to take legal action against you for the deficient balance of $60,000. If the lenders win the deficiency judgment, you are legally required to cover the deficient balance of $60,000. Otherwise, your credit score will plunge by 250 points. Additionally, you won’t be eligible for a mortgage for at least two to four years and you will hurt your credit rating for a period of seven years due to foreclosure.
9. Filling for bankruptcy
Bankruptcy is the worst case scenario and it should be your last alternative if none of the above works, including credit counseling, debt consolidation or forbearance. Filling for bankruptcy will severely lower your credit score and will remain on your credit report for a period of ten years.
10. Not using your full legal name in financial documents
There are all sorts of documents that become part of your credit history including bank accounts, loan applications etc. which do not have your social security on. If you don’t use your full legal name in financial documents the information on your credit report is inaccurate and this can lower your credit score.
Your credit score is extremely important because it provides your lenders with a detailed picture of your financial situation taking into consideration important aspects of your credit history. So, make sure to check on your credit score regularly by asking for a free credit report. Many people have no idea about their credit score until they are denied a mortgage or a line of credit.