Creditors rely on your credit rating to assess how risky it is to loan you money. High credit ratings allow borrowers to access premier financial products under prime conditions due to their perceived low risk. Conversely, individuals with lower scores might face higher lending rates or challenges in obtaining credit approvals. Proceed to learn about five critical influences that might negatively impact your credit rating.
Requesting an Increase in Credit Limit
This might not seem like an obvious factor that could decrease your credit score, as it has the potential to both positively and negatively affect it. Diligently making payments on time can boost your credit score over a period. However, each request for increasing your credit limit may temporarily reduce your score due to the credit checks performed by financial institutions.
Given that practices vary across institutions, it’s wise to inquire whether such a request will lead to a hard or soft inquiry. While a soft inquiry won’t harm your credit score, a hard inquiry can have a temporary negative effect. You can use an app to repair your credit yourself if you’re struggling to pay bills or have a poor credit score.
Duration of Credit History
Lenders are interested in the duration of your credit usage. How many years have you been managing credit responsibilities? What’s the age of your earliest account? What is the mean age of all your accounts?
A lengthy credit history is advantageous, yet its importance diminishes since individuals with shorter credit histories can demonstrate timely payments and low debt levels. This leads to the advice from some personal finance specialists to keep credit card accounts active even if they are no longer in use. The mere age of an account can contribute to enhancing your credit score. Shutting down your oldest account might result in a decrease in your overall credit score.
Credit Mix
The different credit accounts you’ve established account for 10% of your credit score. FICO sorts these accounts into credit cards, installment loans, finance company accounts, retail accounts, and mortgages.
The variety of credit accounts plays a small role in your credit score, and having multiple types is not essential. Demonstrating responsible management across a varied portfolio of credit accounts can prove to lenders your competence in handling several financial commitments.
Cosigning a Loan
Agreeing to cosign a loan can be a generous act to support a child, relative, or friend struggling to secure financing independently. However, this decision warrants careful consideration.
Should the primary borrower you’re assisting not adhere to the payment schedule or default on the loan, such actions could detrimentally reflect on your credit history. Furthermore, disagreements concerning financial obligations and the settlement of debts might disrupt previously solid bonds. It’s wise to proceed with caution when considering cosigning.
Skipping a Single Payment
While it’s commonly understood that a series of late or missed payments can diminish your credit score, what might be less known is the significant damage that even a single late payment can cause.
Your payment history is critical, contributing to 35% of your credit score and ranking as the top factor. The impact of a late payment is compounded by its recency in your credit report and its lateness. Additionally, the higher your initial score, the more severe the reduction will be. Remarkably, just one delayed payment can decrease 90 to 110 points for individuals with a FICO score above 780.
Endnote
Should this information feel too complex, don’t stress. Aim to diligently pay your bills when they’re due and monitor your credit score frequently. Once you’re prepared for more in-depth exploration, consider addressing some of the previously mentioned elements. By dedicating a modest amount of time to study, you can advance your comprehension of credit significantly.