Sometimes you may have made huge purchases such as vehicles and homes and realized the importance of credit score in the lending decision. This is also significant during an opening of a credit card account. Any time when you apply for some kind of credit your credit score and other info contained within the credit reports, together with some other criteria are considered by your lenders and creditors. It is a part of their decision-making process while considering your loan application. A poor credit score is likely to impact this decision negatively. Here are ways this might happen.
Making late payments: What you have on your payment history in your credit and loan accounts goes a long way in the calculation of your credit scores. However, it also depends a lot on the scoring models used and a single late payment on your credit card or loan repayment account can cause a reduction in your credit score. Apart from this, these late payments stay on the credit reports for around seven years. Therefore, keep in mind that it is a good idea to pay the bills on time all the time.
Higher debt to credit utilization ratio: Another crucial factor that is utilized for the calculation of credit score is the debt to credit utilization ratio. This ratio is about how much of your available credit you are using in comparison to the overall amount available to you for use. All creditors and lenders normally prefer to find a low debt to credit ratio that is below 30%. Many people open new accounts just to decrease the debt to credit ratio but it is not a wise thing to do. This is likely to impact your credit score in a couple of ways viz. hard inquiries as a result of these applications and new accounts might lower the average age of the credit accounts. It is a good idea to just apply for the credit you require and when you require it.
Applying for too much credit at the same time: When a creditor or a lender sees your credit reports as a response to your application for a credit, it will develop into a hard inquiry. These hard inquiries will affect your credit score. When you apply for several credit accounts within a short period it is likely to affect your credit score and force the lenders to consider you as a higher-risk borrower. Apart from this, some credit scoring models will consider your recent credit activity as well. Here you will find a caveat. In case you are shopping for a mortgage or auto loan or a new utility provider, these several inquiries for this purpose are normally counted as a single inquiry for a certain period. It allows you to check out multiple lenders to find out the best available loan terms suitable for you. It is significant to know that this exception is not applicable for other kinds of loans such as credit cards.
Selecting your credit card account: Although it might be tempting to close your credit card account that has been fully repaid, it is likely to affect your credit score. Apart from affecting the debt to credit utilization ratio if you close a credit card account it may also impact the mix of credit accounts from the credit reports. Generally speaking, creditors and lenders like to find that you have been able to handle your various credit accounts properly over time. If you close a credit card account you possessed for some time can also shorten your credit history and this may adversely affect your credit score.
Continually checking out the credit reports is one of the ways of keeping track of your credit accounts and knowing which info is getting reported by the creditors and lenders and getting factors to generate the credit scores. You can get a free copy of your credit report after every one year online. There are several other benefits associated with being attached with reliable companies such as Super Credit Score especially in the Clearwater and Pinellas County, FL area. Keep in mind that there are many types of credit scores and it is a good idea to get in touch with a professionals if you have questions on how to improve your credit score.
Picture Credit: Freepik