5 Things That are Damaging Your Credit Rating
Got finances on your mind? Join the club! While you may already follow a budget, track your expenses and save money whenever possible, another area you should monitor is your credit health.
Your credit rating is a metric used by companies like prospective lenders, landlords, employers and other financial institutions in order to determine your fiscal responsibility as an applicant. Your numerical score is calculated based on the information on your credit report, which includes factors like how much credit you use versus what you can use, whether you’ve paid bills on time and what kinds of debt you have.
A poor rating can be difficult to remedy, but it’s certainly not impossible to improve! So, what is it that’s damaging your credit? Here are five possible reasons why your credit score is low.
1. Late or Missed Payments
Did you know that 35 percent of your credit score is based on your payment history?
If you have a credit card or phone contract, chances are that you’ll have to make monthly payments. Some people like to pay their bills off as soon as they arrive, but others leave it a while and pay them off when possible. Which type of person are you?
Delaying bill payments can often result in late or missed payments, and that’s bad news for your credit score. If possible, set up automatic bill payments through your bank for recurring monthly expenses, like utility, cell phone and other debts, so you’ll never miss a due date.
2. You’re Using Too Much of Your Available Credit
Another common reason why your credit score may be low is because your utilization ratio is too high. In general, your credit utilization ratio should remain under 30 percent of your total credit limit; otherwise, the higher your credit utilization ratio, the more your credit score may be affected.
For example, if your credit limit across all your revolving credit accounts is $10,000, you should aim to carry a total monthly balance of no more than $3,000.
Using more credit than you can reasonably afford to pay back may also signal to lenders and creditors that you’re in financial distress, so it may be harder to secure a new line or increase your credit limit.
3. You Don’t Have a Credit History
You’ve always been careful with money, and you’ve saved all of your life to ensure that you never get into debt or have to take out a loan. Now, you want to start a new life across the country, but you don’t have a credit history to prove your longstanding fiscal responsibility.
Unfortunately, having no credit history may prevent you from securing a loan of any kind. Before agreeing to lend you money, lenders look for evidence that you are able to repay money fully and on time; because you’ve never borrowed any money, there’s no evidence of you being able to repay it!
It seems unfair, but those without a sufficient credit history can really struggle to secure a loan or credit card. In order to establish your history, you’ll need to apply for some form of beginner credit, like a secured credit card or phone contract with deposit. Whatever form you choose, remember to always pay off your bills as soon as possible and in full.
4. Rejected Applications
Every time that you apply for a loan or credit, it’s recorded in your credit history as a hard credit inquiry. If you have a lot of recent hard credit inquiries, it may appear that you’re frantically looking to borrow more money. These marks are temporary, but it’s never a good idea to have a lot of negative information on your credit.
If your credit applications are continuously being rejected, you may need to take the time to build up a positive credit rating, pay bills on time and maintain a low utilization ratio. You may also be able to find alternative lenders if you have less-than-perfect credit and still need to borrow money.
5. Mistakes on Your Credit Report
While they’re not as common as some of the other items on this list, a mistake on your credit history can damage your rating significantly. In order to make sure you catch all possible errors, you should check your free credit reports from all major credit bureaus as often as possible. Follow these instructions to dispute incorrect information and have it removed from your reports as soon as possible.