Have you recently applied for a loan or credit card but your request was unsuccessful?
If you already don’t know the reason, it’s likely that your credit score didn’t meet the lender’s requirements.
If your credit score is in the red, it’s in the best interest of your financial wellness to start repairing it. And to do this, it helps to have a good understanding of what hurts your credit score, so that you don’t keep making the same mistakes.
Read on to learn about the main factors that impact your credit.
1. Your Payment History
The average American has about $52,000 in debt. This includes student loans, credit cards, personal loans, auto loans, and a mortgage.
When you have debt, you have an obligation to repay it according to the terms you agreed with the lender. The lender(s) will report your payment record to credit bureaus.
If you’ve been making late payments or skipping them entirely, it’s probably why your credit score is in the red. Payment history accounts for 35 percent of your credit score.
Building a positive payment history is easy. Just repay your loans and settle your credit card balances on time. One late payment won’t necessarily hurt your credit, but if it becomes a habit, your score will fall.
2. Credit Utilization
Credit utilization is how much of your credit limit you use every month.
Here’s an illustration.
You have 3 credit cards, each with a $1,000 limit. So, your total credit limit is $3,000.
If you spend $1,500 by the end of the billing cycle, you will have $1,500 left. This is a 50 percent credit utilization rate.
Yes, you’re free to utilize your line of credit as you wish, but if you’re always maxing out your limit or spending close to the limit, your credit score will take a hit. Spending too much credit is a sign of financial pressure or recklessness.
Maintain a 30% percent utilization rate if you’ve your eyes on building and maintaining good credit.
3. Credit Inquiries
Every time you apply for an installment loan or credit card, the creditor will make an inquiry on your credit. This is how they assess your creditworthiness before making a lending decision.
Credit inquiries can have a negative impact on your credit score. A few points are docked off your score when there’s a credit inquiry. If there are too many inquiries on your credit score information, it means you’re applying for loans and credit cards left, right, and center.
4. Credit Mix
You’re hurting your credit if you’re carrying only one type of debt. For example, if you only have credit card debt, there’s a chance your credit score will drop.
To build good credit, maintain a diverse mix of credit. Take out personal loans in addition to your credit card debt.
Know What’s Hurting Your Credit Score
Your credit score is vital to your financial wellness. Bad credit can make your life more difficult while good credit can make your life easier. A poor payment history, high credit utilization rate, and many credit inquiries are some of the major factors that will impact your credit negatively.
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