Getting a loan or a new line of credit is usually subject to a 3 digit-number known as the credit score. And although it is not the only indicator used by banks and other lenders, your score weighs heavily on your financial health. So, what are the common mistakes that lead to lower credit score and how can you avoid them?
1. Missing or Delaying Payments
Since your credit score is an overview of your financial undertakings up to the point of applying for a loan, how you handle existing debt matters. Delays or late payments on other loans or credit card installments will affect your score negatively.
Up to 35% of your credit score is determined by your credit history. This calls for timely payments, and where that is not possible, negotiate with your lender for fairer terms to ensure continued payments. Luckily, the moment you restart regular payments, your score starts to improve.
2. Over Utilizing Your Credit
As earlier noted, you need to pay your debts on time for your credit score to stay high, but the amount of credit you use matters. Known as credit utilization rate, this is the ratio of your credit card debts divided by the amount of credit that is available to you.
The ratio is expressed as a percentage and the higher it is, the worse your credit score gets. Of your total credit score, 20% is determined by this ratio.
Tip: Whenever possible, only use up to 30% of your credit to ensure that your credit utilization ratio remains low.
3. Having no Credit Lines
As a follow-up on the second mistake, you may think that having zero lines of credit will make your score high. Unfortunately, that would be unwise. Remember that your credit score is derived from your credit history. Without any history to look at, there will be less information for accurate analysis and your score will be low.
4. Having Errors in Your Credit Report
Errors, whether clerical or fraudulent, are some of the common mistakes that lead to a lower credit score. Avoid such mistakes by checking your credit report regularly and disputing any errors. On the upside, credit reporting bureaus are obligated to furnish you with a free report annually.
Also, unlike when a lender requests your credit report which can affect your score adversely, checking your own report has zero effect on your score. Besides, monitoring the report helps you to keep track of any payment that you might have missed. So, check your report periodically and ensure that you can account for all entries.
5. Closing Your Credit Facilities
After you have paid off a credit card or loan, what comes next? Choosing to close the credit line is a huge mistake. Essentially, you will be erasing a good history that speaks to your ability to repay debts. Particularly, if you were repaying your monthly debt installments on time, then that history needs to be on your report.
Also, closing credit cards lowers the average age of your accounts, which in turn lowers your credit score. Known as credit age, this is the average time that your accounts have been active, and the higher it is, the better your credit score will be.
15% of your FICO credit score is based on the length of your credit history.
A low credit score can deny you anything from a mortgage to a new credit card. A bad score also means high rates and other stringent terms on a new loan. You can keep your credit score from dropping by avoiding all of the above common financial mistakes.
For credit repair and financial advice, contact Credit Absolute for a free consultation.
Personal Credit Scores & Business Loans
Will Your Personal Credit Score Affect Your Business Loan Application?
Congratulations! You’ve decided to begin the process of applying for a small business loan. This is an exciting time for your new or existing company and could forecast many great things.
If this is your first time applying for a business loan, you might not be aware of the potential barriers that can get in your way. After all, receiving a business loan for your start-up or expansion can be competitive, and banks want to ensure that they trust only the best with their investments. Before you jump all in, you’ll want to have a clear understanding of the things that could qualify or even disqualify you from receiving funding.
One of these factors is your personal credit score.
If you are a small business owner in the United States, the three credit bureaus track two profiles: your personal financial history and your business credit history. Each profile plays a vital role in getting approved for a business loan. However, if your starting a new business or your existing business doesn’t have established business credit, the lender may rely more heavily on your personal creditworthiness when making their lending decision.
While your personal credit score and business credit profile express different information about you and your business, both have a substantial impact on the options available to your business and your ability to qualify for a loan.
Why Lenders Care About Your Personal Credit Score
Some business owners don’t think that their personal credit score has much of an impact when it comes to their organization. This just isn’t the case. A potential creditor is going to consider your personal credit score when making a decision to grant your company a business loan.
In general, a potential lender is going to view your credit score to determine if you:
- Have the ability to repay the loan?
- Are going to repay the loan?
- Will pay the loan even if something unexpected happens?
Lenders see your credit score as an insight into your financial health and responsibility. Unfortunately, if a lender sees that you are not able to manage your personal finances, they may assume that you are a high risk for managing business finances as well. This is especially true if you are a new business owner. Without an established business history or credit to your company’s name, the only way the lender will be able to determine creditworthiness is by accessing your personal credit score.
How is my credit score calculated?
Three primary credit bureaus generate a credit score for lenders to access. Each reporting agency uses the same basic FICO formula to score the information that they collect. They also obtain personal information such as full legal name, date of birth, employment history, address, etc. They also list a summary of information that was provided to them by your creditors. Other information found in public records like bankruptcy or judgments are also included on your credit report and factored into your score. Each time that you apply for credit is also recorded on your report.
There are primary differences in the way that the three credit bureaus review and calculate your personal credit history. For example, Transunion holds more detail about your employment information, Equifax separates your accounts that are open and closed, and Experian will record data like whether or not you are paying your rent and other bills on time. Essentially, these agencies are competitors, and lenders may choose to report to one bureau and not the other. While their data might include different results, their score is typically similar.
Importance of a Good Credit Score For Your Business
While you may not feel that your personal credit history is the best representation of how you will meet and exceed your business’s financial obligations, the need to establish and maintain a positive credit score is vital for every small business owner. Most banks and lenders take a close look at your credit score when they evaluate your worthiness as a business borrower and even consider the score in their decision-making process – regardless of how long your business has been operating.
How Credit Scores are Affected by Bankruptcy, Foreclosure & More
Below we’ve outlined four issues that could cause the biggest drop in your credit score. We have also listed the average point loss for each item.
How Much Does a Bankruptcy Lower Your Credit Score?
The higher your starting score, the more points you’ll lose for filing for bankruptcy. For a person with a credit score of 680, filing for bankruptcy will lower your score by 130-150 points. For a person with a score of 780, filing for bankruptcy will cost you 220-240 points.
How Much Does a Foreclosure Lower Your Credit Score?
According to FICO, if your credit score is 680, a foreclosure will drop your credit score on average by 85 to 105 points. If your credit score is excellent, at 780, a foreclosure will drop your score by 140 to 160 points. In other words, the higher your credit score, the more your score will be affected.
How Much Does a Late Payment Lower Your Credit Score?
One late payment could have a more significant impact on higher credit scores. According to FICO data, a 30-day delinquency could cause as much as a 90- to 110-point drop on a FICO Score of 780 for a consumer who has never missed a payment on any credit account.
How Much Does a Car Repossession Lower Your Credit Score?
Having your vehicle repossessed could cause a 100-point drop in your credit score. And late payments, collections, and public records generally all stay on your credit for about seven years, according to myFICO.com.
For most people, the above issues are unavoidable but in certain circumstances, it is a choice to make depending on your financial situation. If you are swimming in debt and are debating filing for bankruptcy, for instance, you may want to consider a few things first. In that scenario, if your credit score is already low due to late payments, high debt-to-income ratio, and delinquent accounts, you could potentially improve your credit quicker by filing for bankruptcy as it would not have as big an impact on your score but would give you the fresh start needed to start rebuilding your credit.
For assistance with credit repair or counseling, contact Credit Absolute.
Helpful Guide to Reading Your Credit Report
Your credit report contains information about your financial history including lines of credit and how you are settling them. It’s advisable to review your credit report at least once a year. This allows you to tell how you fair in the eyes of creditors. It also helps you to come up with ways to fix your report for the better.
That said, understanding the information contained in this report can be difficult, especially for first-timers. To ensure that you don’t miss a thing, here is a guide to reading your credit report.
Credit Report Breakdown
The format of these reports varies depending on the reporting bureau that you get the report from. The information is however similar and is broken down into several fields.
Subscriber or Personal Information- Consumer Demographics
Personal information includes any information that identifies you. Here, you will find your name, address, residence type, geographical code, social security number, current or former employers, date of birth, and telephone numbers.
This field is used to identify you and does not in any way factor in your credit scoring. There could be variations in your name or addresses from different bureau which should not be a cause for concern. You should, however, make sure that each variation (if any) identifies to you and is not a case of identity fraud.
This section contains your accounts and their balances. It’s a summary of bank accounts including current and delinquent accounts as they have been reported by creditors. This snapshot of your finances includes;
- Mortgage accounts
- Credit cards
- Personal loans; car, student, and other loans apart from mortgages
- Collection accounts
- Any other accounts; lines of credit or trades
The accounts’ information captured in this section also touches on the total number of open and closed accounts. Inquiries made on your report for the last two years will also feature as part of the summary.
The credit summary also gives you a quick overview of monthly payments, balances, and past due amounts. The summary will also contain any delinquencies which can be current or previous depending on what your creditor reported.
This forms the biggest chunk of your credit report. Each account is analyzed in the finest detail. This is where you need to concentrate on weeding out any inconsistencies. Each account is broken down into several fields;
- Name of creditor
- Account particulars (number, type, and ownership or responsibility)
- The highest amount ever owed
- Maximum credit approved
- Balance owed
- Past due amount
- Monthly payment
- Available revolving credit
- Dates opened and date reported
- Payment status
Account history also contains remarks to explain special conditions pertaining to the account. Remarks can also be from your creditors indicating delinquencies or simply the standing of the account- Open, Negative, or Closed.
You may find some of the information contained in this section not to be up-to-date. This might include balances on credit cards or loans which you expect to be much lower. The reason behind this is that creditors might have reported the balances long before you had made your monthly installments.
This is one section that should worry you if it’s highly populated. It contains information from public records pertaining to:
- State and court judgments
- Tax liens
- Overdue spousal or child support- depends on specific state
Why should this worry you?
This information stays on your credit reports for 7-10 years. If your credit report is clear on this section then it’s advisable to ensure it stays that way!
Some bureaus will also include your FICO credit scores on the report. This is a 3-figure scoring system that ranges from the lowest, 300 to the highest possible score of 850 points. It determines your creditworthiness in the eyes of creditors. It may also affect your chances of employment or even your rent terms.
This is a list of parties including institutions that have requested your credit report. Your report will include hard and soft inquiries: Hard inquiries are requests made by creditors after you have authorized them when applying for loans or credit cards. Soft inquiries are the ones made by creditors (without your knowledge) for promotional purposes.
Credit reports can be difficult to read, leave alone understanding the entries. The above breakdown should guide you in identifying the important details contained in each section. Pro Tip: Be on the lookout for any inconsistencies that may point to errors originating from your creditors, the reporting bureau, or as a result of fraud. Such errors could be lowering your credit score and should be disputed immediately.
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