Factors that drop your credit score



There is something in your life that is extremely important, but often overlooked. No, it’s not your family or your home. It is, instead, your credit score. Your credit score is really important because it dictates several things for you. It dictates how much of a loan you may get, what your interest rate will be, and how reliable and respectable you appear toward companies. As you can see, your credit score plays a huge role in your life from a financial perspective.

The average credit score in the United States sits around 680. That’s not bad, but it’s certainly not amazing. Chances are, if you’ve got a ton of debt, your credit score is actually considerably lower than that.

Do you know what causes your credit score to decrease? A lot of people don’t, which is why their credit score is hurt in the first place—they do not know what to do to prevent their credit score from dropping. In this article, we’ll go over the seven factors that drop your credit score. These factors are:

• Payment History
• Amount Owed
• Level of New Debt
• Closing Accounts
• Length of History
• Fines
• Bankruptcy

Each of these factors are covered thoroughly below.

Factor #1: Payment History

Payment history makes up 35% of the credit score. That means that if you have a poor payment history, it can have a profound effect on your credit score. For example, if you make a single late payment—be it a credit card, mortgage or car payment—it can lower your score by as much as 100 points. That sounds like a lot, doesn’t it?

What if you are late on not one payment, but two? Then your credit score may go down by another 50-100 points. After losing 150-200 points, your credit score may stand at a poor 500. Repairing such a great loss can be extremely difficult, which is why you should always make every payment on time.

Factor #2: Amount Owed

Responsible credit card use can actually be a good thing for your credit score. What isn’t a good thing, though, is owing a ton of money. Even if you maintain a superb payment history, if you owe a lot of money, your credit score will still be negatively affected. So how much is a safe amount to owe? That depends on what your credit limit is for each credit card.

Let’s assume you’ve got a $2000 credit limit on your card. The same amount to owe is 35% of this limit or less. If you owe more than 35%, it will hurt your credit score. Also, having credit card debt that exceeds $5000 overall can really hurt your score.

Factor #3: Level of New Debt

Every day, people often receive several new credit card offers. This is particularly true if they have a good credit score. Did you know that opening up too many new credit cards in a short period can hurt your score? Well, it can. While it may be tempting to open up as many credit card accounts as possible, you should try to limit yourself to no more than 1 or 2 every 6-12 months. That way, you do not open up too many accounts at one time. It may be hard, but it will save you in the long run.

Factor #4: Closing Accounts

You've decided to stop using a charge card or two. Common sense tells you to close the accounts so that you cannot use them again. However, from a credit score standpoint, this is not a logical thing to do. In fact, closing your accounts before they are paid off can hurt your credit score because it signals that you have simply given up on the card. It also takes away a positive reference because you are closing an account that has been kept in good standing. So whatever you do, do not close the account until it is fully paid off. Otherwise, you'll be doing more harm than good to your credit score.

Factor #5: Length of History

Another key factor that can drop your credit score is the length of history of your card. If you've had a card for a year or two, have debt on it and close it before it is paid off, this will negatively affect your credit score. Even if you have paid it off, it is considered bad practice to cancel a card after just a few years of use. What helps your credit score is to have long-standing, good accounts. What hurts your credit score is to cancel accounts prematurely. Don't make this costly mistake.

Factor #6: Fines

We're not talking about the typical late payment fines. Instead, we're talking about everyday fines like parking tickets, library late fees and any other fine. Increasingly, these fines are being turned over to collection agencies. When these fines become delinquent and are in collection agencies, your credit score is negatively impacted. In fact, a single bill placed in a collection agency can shave as much as 100 points off your credit score. So never, ever allow any debt to get to the point where it is sent to a collection agency. Pay your late fines and tickets and you'll be alright.

Factor #7: Bankruptcy

Bankruptcy may take a load off your back, but it also sends your credit score to the gutter. That's because the bankruptcy shows that you could not pay off all the debt you accumulated, and so you appear to be someone that has simply given up. This makes you extremely unappealing to potential lenders and potentially decreases your credit score by hundreds of points. The bankruptcy also stays on your record for many, many years afterwards. In essence, a bankruptcy does a whole lot of harm to your score and this harm may never be reversed.

If you are able to take all the above into consideration and avoid making the mistakes mentioned, you can prevent your credit score from dropping. That's something that every credit holder should strive to do.