If you are an adult you already know how important credit scores are. It is very important to always keep your credit score high. This is because it plays a significant role in your financial life. A credit score is a number that is used to depict the creditworthiness of a person. This number is provided by various credit monitoring bureaus. But most of the lenders only consider the credit scores given by the largest credit monitoring bureaus. Equifax and Experian are the credit bureau companies that provide credit scores and credit reports of people. These companies do this by collecting information from various financial institutions. But the financial institutions always do not provide data to all of these companies. This means that the credit scores offered by these companies are not always the same.
Each company may provide a slightly different credit score. The credit scores are given to each person by using the VantageScore 3.0 model which is the latest one of its kind. The credit score ranges from anywhere between 300 to 850. Many financial institutions see these scores to determine if they want to lend you money or not. Not only that, but they also decide on how much interest you are going to pay for your loan by looking at your credit score. One of the main advantages of having a high credit score is that you will get loans for lower interests. This is because a person with a good credit score is more likely to pay his debts on time compared to a person with a low credit score. For many people seeing their credit score is low can be a frightening experience.
This article will make you understand how your credit score dropped. So let’s dive into it.
You could’ve missed a payment
One of the most important factors that is taken into consideration while calculating your credit score is your payment history. This is also one of the most common reasons for witnessing a drop in credits score. It is very important to pay your debts on time as those payments contribute to nearly 35% of your overall credit score. A credit score is often a representation of how likely you are going to pay your debts on time. So do not have any late payments in your credit history as they are huge red flags for credit monitoring bureaus. But you don’t have to worry if you missed the due date of your payments by one or two weeks as it is completely fine.
Payment is only considered late if you are late by 30 or more than 30 days. But after that the later you are the more it affects your credit score. Keep this in mind because you may lose anywhere between 90 to 110 according to FICO data if you make a late payment. The other important thing to know is, because of your late payment you may have to pay a late fee. This also means that you have to pay interest for that. You have to make your payments on time to save yourself from getting a low credit score. Automate your bill payments so that you never miss a due date. There are also some other simple steps to increase your credit score.
Closing one of your credit cards
This may come out as a surprise to many people but closing one of your credit cards will make your credit scores go down. Yes, closing credit can also be a reason why your credit score went down. This is because financial institutions look for people who have a higher credit limit. The reason for this is, if a person has a higher credit limit then he is more likely to spend more and pay off the debt on time. Closing one of your credit cards can also mean that you are closing it because you can’t pay the credit. This also causes your total credit limit to go down.
But there is a simple thing you can do to save your credit score from dropping as well as increasing your credit limit at the same time. All you have to do is to make sure that your usage of credit is well below the credit limit every month. If you do that you can increase your credit limit which will also affect your credit score. Keeping all of your accounts open will always help you in maintaining your credit score.
Increase in credit utilization ratio
A credit utilization ratio is a ratio that represents how much you use your credit cards. If this ratio is consistently high then it will automatically cause your credit score to drop. If you don’t know how to calculate your credit utilization ratio then it is very simple. All you have to do is divide the amount of credit you used with the amount of credit that is available to you. After doing that you have to multiply the number with 100. This will give you a percentage. If the number is really high then you are using most of the credit that is available to you which is not a good thing. Because using most of your credit will make the credit monitoring bureaus believe that your financial position is really bad.
But if you use 15 or 20% then it is not a big deal. If you can do that you are quite safe. A lender only wants to lend money to someone who uses less credit. People like this are not deemed as risky by financial institutions. A credit utilization ratio above 30% can easily cause your credit score to drop. Monitoring your credit score regularly will help you take the necessary steps to prevent it from going down. If you cannot afford a premium service you can go for the platforms that offer free services. There are a number of applications that allow you to monitor and check your credit score for free.
Having a high credit score has more advantages which can help you in the future. You are more likely to get a new credit card or loan if your credit score is good. Checking your credit score regularly will help you in maintaining it. One must understand the credit score ranges to know how it can affect them financially. If you have a good credit score then you can also increase the amount of money you can borrow. There is also a chance that your credit score is wrongly depicted. So keep checking your credit score on various platforms.