In today’s society, you would be hard-pressed to find a person that has never dealt with any kind of credit loan. We use them all the time – credit cards, mortgages, bank loans. They are part of our day-to-day life, an essential one. That is why financial competence is so vital for a modern person.
If you have no clue what is happening with your money, why things are as they are, what makes your credit score go down, and what makes it go up – you risk facing a lot of troubles and wasted money.
Our company, DebtQuest USA, likes to share our financial expertise with people. That is why we would like to help you understand the correlation of your actions with your credit score, one of the most important factors for good credit health.
First things first – what exactly is a credit score? Basically, this is a parameter that represents your reliability to the lender. To put it simply – by looking at your credit score, your potential credit issuer can understand what the chances of you paying back are and how big the risks are for them.
This number is composed of the data that is represented in your credit reports. 90% of all lenders use very particular standards for these scores – also known as FICO scores. And when your potential credit issuer is considering you for a loan, he wants to be as confident in such “investment” as possible. That is why he pulls your previous reports and, on top of that, your score.
A good credit score is extremely important for any person who has a need to use borrowed money. Aside from the fact that the higher your score is, the more chances of getting a loan you have, there is another very important factor: if your score is very low, your interest rate is going to be rather high. And this means that the whole idea of asking for credit is unprofitable and quite risky.
By now, you probably find yourself asking a simple question: how does your credit score go up and down? What is the reason for such fluctuations? Or maybe there is more than just one reason?
Let’s start with the last one. Yes, there are a lot of factors that can affect your credit score. All of them are a crucial part of the calculations. However, it does not mean that your score going down equals you have made a mistake somewhere. Most likely, you haven’t done anything wrong! But enough with the chit-chat, let’s cut to the chase. When a person’s credit score is dropping for no reason at all, the chances are high that something from the list below has happened:
We are all people, and we all sometimes make mistakes. Your file may contain a tiny inaccuracy in it, but it will cost you a lot. It may be you who is guilty of this mistake, or the lender unintentionally wrote down something wrong. One should always check credit reports if there is the possibility of a mistake.
There is one more thing worth mentioning in this paragraph. Sometimes an error in your credit report may be not the consequence of someone’s lack of attention. There is a possibility that you have become a victim of identity fraud. Criminals have managed to steal your access to say, your credit card without you noticing it, and that is why your credit score has now tanked. If you suspect anything like this has happened, immediately inform the authorities.
If you are spending money from your credit card on whatever you want without even considering your budget or circumstances, you may face problems with your credit score afterward. You see, your credit card has a certain limit, let’s say it is $5,000. There is a thing called a credit utilization ratio.
In a nutshell, the more credit you spent, the worse your future credit score will be, as a lender sees that you tend to live beyond your means and spend more money than you actually need to, like on a new TV, for example.
The lower this ratio is, the better things are for you. Spending $1,000 would make the ratio 20%, which is rather good. However, if you spend $2,500, you make your ratio 50%. And that is already a cause for concern.
Each new credit line you get affects your credit score. It does not matter what kind of credit you take: it could be a mortgage, a car loan, or maybe simple issuing a new credit card. It is all the same. If you have taken out a lot of loans during a short period of time, this may end badly for you – as your credit score will be affected for at least a year!
However, even if you are in control of your credits and you are consciously taking care of such things, it does not mean that your score won’t go down after you get a new loan.
Each new credit account will lower your scores, because every new lender is checking your credit history, thus creating a soft inquiry, which is harmless. But the moment the lender decides to give you the money, he makes a hard inquiry. Each one of these inquiries will cause your score to lower by a couple of dozen points. Such records are kept in the archive for two years.
Now, that is probably the most obvious reason. And yes, that one is completely your fault. When you are not paying your debts on time, it does not do any good for you and your credit score. Even if it was just once, it would still have a lot of influence on the calculations.
Let’s not forget that if you do not pay at all, credit issuers will definitely transfer your debt to a collection agency. And none of us wants that. Moreover, information on your late payments will be stored for seven years in your file. That means that even if you made a mistake six years ago and did not pay in time just once, your credit score will still be lower than it could have been.
Now, let’s imagine that something from the list above happened and know you have to think about how to increase your credit score again. Actually, there is no secret to it; the rules are very simple:
- First and most important – you have to pay your bills on time. There is no way you can have a nice, good credit score if your payments are always late.
- Do not get caught in the trap of dozens of credit cards – though it may seem like a good decision now (get a credit card to cover debts from the previous one), eventually you will understand that this was a huge mistake and know you have even more debts and a low credit score.
- Try to analyze your spending patterns – do you really need all that money? Maybe if you change some little things in your everyday routine, you will be able to save some extra bucks?
- Living above your pay grade is always a bad idea. There is no point in buying luxurious cars or watches if you will be living in a shoebox, as all your money will be flushed down that cash toilet.
So as you can see, it is not as complicated as it looked. Sure, it takes a lot of time to understand everything you need to know about your credit score and how it is affected by all of the other factors. However, in the end, you will save yourself a lot of time, money and aggravation, when you are able to handle your affairs in such a way that your credit score will only get higher and higher! DebtQuest USA will gladly help you with that!