Missing Or Late Payments
Payment history makes up 35% of your credit score and is the single biggest factor that goes into calculating it.
Accordingly, late or missed payments can knock many points off your score.
- Payments that you make after the due date (or not at all) make you look like a risky borrower. A missed payment once in a while may not do serious damage, but if it becomes a habit your FICO score could drop considerably.
- Instead of missing payments, it’s a good idea to communicate with your credit provider. Many lenders will be willing to offer you a payment extension if you let them know ahead of time.
- It’s important to schedule your payments and know the minimum payment amount for each. You can also opt to use autopay and have your payments debited on the same date every month.
Not Paying Credit Card Bills
Credit cards are one of the most popular types of consumer debt - yet 46 million Americans will likely miss at least one payment in 2020.
If you’re having trouble making credit card payments you’ll need to act quickly to avoid damaging your FICO score.
- Late credit card payments appear on your credit history and have a negative effect on your score.
- Your card issuer may charge you a late payment fee and you run the risk of paying higher APRs or having future limit increase requests rejected.
- Unpaid balances will keep accruing interest and service charges. These amounts can snowball over time and cost you hundreds or thousands of dollars to settle.
- It’s better to contact your credit card company in advance and reach an agreement if you can’t pay your installment.
Many Credit Checks
Whenever you apply for credit, a home rental, or even a job that involves financial management, there’s a good chance your credit will be checked.
A credit check is a request made to a credit bureau to provide details about your credit history as well as your FICO or VantageScore.
- There are two types of credit checks. A hard check involves your full credit history while a soft check is just a basic check.
- Hard credit checks knock a few points off your credit score each time.
- Soft credit checks are often used for pre-approvals and don’t affect your score.
- If you apply for many types of credit that involve hard credit checks, your score may fall noticeably for a few months.
Small Repayments
One of the most convenient features of credit cards - and some loans - is the minimum payment option.
Having the option to only pay the minimum balance due can free up money in your monthly budget - but it may also lower your credit score.
- Small repayments have a mixed effect on your credit score.
- The lower installment amount makes it easier to meet your payment obligations and this will actually boost your score by improving your payment history.
- Making small payments also means that the total amount of available credit you’re using (credit utilization) remains higher for longer. This can harm your credit score in the long run.
- Consider paying your minimum balance on time each month and reducing your credit utilization below 30% by making extra payments just before the payment due date. This will help to raise your FICO score.
A Charge Off
Charge offs are some of the most damaging negative marks that appear on a credit record.
A charge off usually happens when a debt has been unpaid for more than 6 months.
- When a lender declares a charge off on your account they’re essentially telling the credit bureau that they don’t expect you to honor your payment obligations.
- This can have a very negative effect on your credit score - you could lose up to 100 points depending on the credit bureau involved.
- Avoiding a charge off isn’t difficult. If you find that you’re unable to pay your account you could request an extension or opt for credit counseling.
- Don’t ignore payment reminders. Your lender will try to give you several chances to restore your account to good standing - and that will save your credit score.
Filing For Bankruptcy
Bankruptcy can have a huge effect on your credit.
Your score will drop by over 100 points and your credit history will reflect this negative event for 7 to 10 years.
- A bankruptcy can drop your credit score by up to 200 points. This could ruin your chances of being approved for credit-based applications for years to come.
- Before you make the decision to file for bankruptcy you need to be certain that you have no other options left. Debt consolidation, credit counseling, and hardship programs could help you settle your debt affordably without declaring yourself bankrupt.
- It’s worth noting that Chapter 13 bankruptcy (which involves a repayment plan) may damage your credit less than Chapter 7 bankruptcy. Always consult a professional before filing.
Conclusion
A low credit score can cause considerable inconvenience in your financial life - and there are several reasons why yours may be lower than it could be.
Making payments on time, keeping your credit utilization low, paying more than the minimum balance, and avoiding multiple hard credit checks can all help to keep your score high.
It’s also advisable to avoid charge offs and declaring bankruptcy as these major financial events can send your score tumbling by more than 100 points.
By managing your credit well, you’ll keep your FICO score high enough to enjoy the benefits that come with easy approval for loans, credit cards, and other types of credit.
