Credit score is an essential component of your creditworthiness. Know the reasons why your credit score might have dropped and what you can do about it.
Imagine yourself wanting to buy a house. What’s the first thing that will come to your mind? (after visualizing your dream house, of course) The money that you need to make this investment. Correct?
Now, if you lack funds, what’s the next option you have? Loans. You can take a house loan and buy yourself a decent home. But, are you even eligible to take a loan? Let's find out.
If we observe from your individual aspect, what determines your eligibility to take a loan is your credit score.
In a more simple sense, a credit score is a number between 300-850 that determines an individual’s credit worthiness.
A credit score of around 500-700 is considered to be good enough. Whenever you are stepping out to apply for a loan, you must verify your credit score and take immediate action to improve it if it is below 600.
But why would you need a credit score? A good credit score will help you in getting your hand over the best interest rate deals.
In addition, you will pay low financial charges on your credit card bills. These benefits are enough for you to work towards getting a decent credit score.
If you have an alarmingly low credit score, you can do the following to improve it:
- Pay your bills on time. Doing so will improve your credit worthiness and demonstrate your reliability to the lenders.
- Review your credit report on a regular basis and avoid indulging in risky activities like credit cards and loans too often.
- Try paying your debts sooner when applying for a loan. This will not only improve your credit worthiness but also eliminate some of your liabilities.
If you find yourself stuck with a low credit score that keeps on declining despite your efforts, here’s what might be going wrong:
1. Some payments are clearly due - time to track them
The record of your timely or late payments is the biggest factor in determining your credit score.
It may be possible that your creditor considers a payment late even if it is just by one day past the due date. However, a late payment is not recorded with the credit bureau unless it is past due by 30 days.
Therefore, in reality, you always have enough time to make payments on time and save your credit score from falling down. Failing to do so will take down your credit score, and you will suffer every time you apply for a loan.
A single late payment makes a huge difference to your creditworthiness as it will remain on your credit report for around 7 years. As time passes by and you pay your dues on time, this effect will fall in the long run, and hence you will be able to achieve a good credit score.
2. You have very high debt balances - one of the major factors
Another major factor that determines your credit score is the history of your debt balances. A huge pile of debt accounts (loans or credit cards) can make or break your credit score.
For example, the loans that you are about to fully repay will display a positive sign on your credit report, but the new ones will do the opposite since your liability is rising.
Similarly, for a credit card, your Credit Utilization Ratio displays your risk.
As your credit card balance will go up, so will your credit utilization ratio and this will clearly lay out the risk you present to a lender if he/she considers lending you a loan. Definitely, this is not healthy for your credit score.
Try to keep this ratio at least under 30%, if not more.
3. You are relying on a limited credit history - not a good sign
A very limited credit history can also be the reason for a decline in your credit score. (Side Note: No Credit History? Here's how you can Establish Credit.) Generally, the length of your credit history will have the following components:
- The average age of your bank accounts
- The age of your oldest bank account
- The length of time since you last opened a new account
A longer history of credit is a positive display on your credit report, and the opposite is true for a shorter history. In general, having a limited credit history can stop your credit score from rising.
If you wish to improve this sooner, you can do so by making yourself an authorized user of one of your family member’s credit cards. If the primary cardholder agrees, you can even use it to make purchases.
But the best thing would be if the primary holder of the card makes timely payments of the dues since this will help you to improve your credit score.
4. You may have submitted multiple applications for credit cards
Every time you submit a credit card application, the lender will check your credit reports.
This will lead to a rising Hard Inquiry. Basically, they represent that a creditor has requested to check your credit report in order to determine how risky of a borrower you are.
This gets displayed on your credit reports and is a sign of you being a risky borrower- definitely not what you aim to be. Hence, you must try to limit such requests and refrain from frequently applying for credit cards.
5. Your accounts are limited to a single credit account
Your credit mix, variability of installment credit accounts, etc., is also a major factor in calculating your credit score.
If you have a variety of credit accounts, this will display your ability to manage different types of debt to the lenders- a very positive influence on your credit report, therefore. You can try to improve your credit score by improving your credit mix.
However, you must not get into an additional debt solely for this reason.
6. Discrepancies on the creditor’s side - not really your fault
The flaw may not always be on your part.
If a creditor mistakenly reports a payment due or anything negative, your credit report will definitely suffer. This is why you must consider taking a look at your credit report frequently and report any discrepancy to your creditor as soon as possible.
These were the 6 reasons why your credit score might not be rising. If you are keen on knowing more about credit scores, you can refer to this guide. The Road to a Good Credit Score isn't Short: Start Today!