A good credit score increases your chances of qualifying for credit and accessing lower interest rates on things like mortgages and loans. VantageScore and FICO score are standard credit scoring systems that calculate your credit score and assign you a range.
Unfortunately, most Americans don’t realize that different factors could impact their credit score, affecting their chances of qualifying for new credit or getting pre-approved for a mortgage.
Read on as we discuss 11 lesser-known factors that could impact your credit score and how to avoid falling into that trap.
Failing To Have a Credit Mix in Your Credit Report
Your credit mix accounts for 10% of your total FICO score and up to 20% in the VantageScore model. The credit mix consists of the different types of credit accounts you own. That can be loans like mortgages, credit cards, or revolving accounts.
However, owning a single type of credit on your profile can impact your score. Focus on having at least two or three credit types on your credit profile to impact your score positively.
Getting Rid of All Your Credit Cards
While getting rid of all your credit cards can help you be more accountable and mindful of your spending, it can also affect your credit score. That’s because it can impact your credit history, credit mix, and credit utilization ratio, all factors that scoring systems review when determining your credit score.
Cancelling a card also reduces your account’s average age, leading to a shorter credit history. Before canceling a credit card, ensure you pay any pending balance, redeem your rewards, and take note of automatic payments. Follow up with your card issuer to confirm your cancellation.
Having a Settled Account
A settled account shows that you’ve been unable to keep up with repayment, which can negatively impact your credit score. It also warns potential lenders, further interfering with your credit history. The best alternative is to talk to your credit card company and agree on a favorable amount to convert a settled account to a closed account.
Missing a Credit Card Payment
Lenders examine your previous credit card payments to determine your likelihood of repaying a loan. Previous payment history accounts for 35% of your FICO credit score. Although a single late payment won’t significantly affect your score, multiple missed payments will sink your score.
Making payments on time enhances your payment history and shows you’re reliable to lenders. It also improves your credit score.
Multiple Loan Inquiries
Making inquiries can impact your credit history and score. Soft inquiries happen when you review your credit report, but hard inquiries occur when you actively apply for a mortgage or a new credit card. A single hard inquiry can lower your score by five points.
Applying for several loans within a short time will appear on your credit report, which shows that you’re high-risk and negatively affects your score.
High Credit Utilization Ratio
A high credit utilization ratio occurs when you use more than 30% of your available credit card limit. Unfortunately, your credit utilization ratio makes up to 30% of your FICO score, and exceeding that limit could impact your score. Focus on keeping your utilization ratio between 20% and 30% to maintain a good score.
Applying for Many Credit Cards at Once
Applying for multiple credit cards at once is a major red flag. Apart from reducing your credit history length, it also shows up as too many hard inquiries on your credit report, which can lower your score drastically.
Cosigning a Loan
Co-signing a loan or opening a credit card for your friend or family member may seem innocent, but it could affect your credit score indirectly. The loan amount or account balance can affect your utilization rate, and any new hard inquiry can appear on your credit report. Additionally, if your friend misses a payment, it can show up on your credit history and impact your score.
Mistakes on Your Credit Report
Another surprising factor affecting your credit score is mistakes on your credit report. Incomplete or inaccurate information can lead to errors in your credit history and negatively impact your credit score.
Going through your credit report for mistakes like incorrect payment date, wrong payment history, accounts you didn’t open, or wrong address/name on an account can help you report these mistakes to the credit bureau and improve your score.
These are some of the factors that can negatively affect your credit score. Understanding the connection between your score and financial habits can help you make better decisions to improve your credit score.
