Your credit score can fluctuate based on how you manage your credit and finances. While you may already understand the basics of credit scoring, let’s take a deeper look at the factors that can negatively impact your credit score, so you can avoid common pitfalls and protect your financial health.
Late or Missed Payments
- Impact: The most detrimental factor to your credit score is failing to make payments on time. A single missed payment can reduce your score by as much as 100 points, and if your payment is 30 days or more overdue, it will likely be reported to the credit bureaus, which can hurt your credit.
- Tip: Set up automatic payments or reminders to avoid late payments. If you’re having trouble making payments, contact your creditors to discuss possible solutions.
High Credit Utilization
- Impact: Using a high percentage of your available credit is a red flag to lenders. High utilization indicates that you might be overextending yourself financially, which can lead to lower scores.
- Tip: Aim to keep your credit utilization below 30%. If possible, pay off your credit card balances in full each month to keep your utilization low and your score high.
Applying for Too Much Credit
- Impact: When you apply for new credit, each application results in a hard inquiry on your credit report. Multiple inquiries within a short period can hurt your score, as it suggests you might be desperate for credit or unable to manage your finances.
- Tip: Only apply for credit when you truly need it. Space out applications for credit products to minimize the impact on your score.
Bankruptcies or Collections
- Impact: Severe financial events like bankruptcy or accounts sent to collections can severely damage your credit score and stay on your credit report for up to seven years.
- Tip: If you’re in financial difficulty, consider speaking with a credit counselor or financial advisor to avoid drastic actions like bankruptcy and explore debt repayment strategies.
Closed Accounts
- Impact: Closing a credit card or loan account may lower your available credit and negatively impact your credit utilization ratio, leading to a lower score.
- Tip: If possible, keep old credit accounts open, even if you don’t use them frequently. However, ensure there are no fees or penalties associated with keeping the account open.