Why Your Credit Score Is Crashing And How To Improve It

A bad or poor credit score is like a flat tire on a long distance trip.

You will have no choice but to move at snail’s speed and miss out on so many really good perks.

The good news is that you can replace your tire if you have a spare – and that’s exactly how credit score works!

Building your credit score is not rocket science.

In this article, we’re going to look at what is hurting your credit score, how to improve your credit score, factors that aren’t considered in your credit score, how your credit score is calculated, why you may have different credit scores and how to get your free credit score.

Once you’re done reading this piece, you will know exactly how to put the right foot forward in order to stop your credit score from crashing and then start building your score seamlessly.

What is hurting your credit score?

So why exactly is your credit score nosediving?

There are several reasons why the figures aren’t where you want them to be. Let’s dive in to find out!

Hard Inquiries

A credit check can have an impact on your credit score if such check is a hard credit inquiry. 

This sort of credit inquiry is often done by creditors who intend to view your complete profile in order to ascertain your creditworthiness and make a decision to either approve or decline your loan application.

However, a hard credit check only trigger a small decline which is temporary until you start repaying the debt.

You should check your credit score for free on Credit Sesame to find out if you have anything that could negatively affect your credit report. 

Increase in debt/credit ratio

If you have a sudden spike in balance without an extended new credit line, your score could tumble.

This is mostly true if such a balance is on a credit card and won’t be paid off any time soon.

In fact, the percentage of extended credit you use could affect up to 30% of your credit rating.

So you should be conscious of the amount of credit that is extended your way and keep your balances as low as you can.

Government or Private Liens

If you have a government or private lien on any property, it can have a negative impact on your credit score.

Sadly, it doesn’t matter if the lien is only $200 or $200,000.

However, as soon as you pay off the lien, your credit score will begin to rise.

But liens will remain in your credit for about seven to ten years just like bankruptcy.

But there’s a way around some liens.

If you have a lien that was not enforced by a federal or state government, you should consider petitioning credit bureaus to get rid of it.

While such an action is rare, you have nothing to lose by giving it a try.

Bankruptcy

Many of those who cannot handle their debt and need a way out often file a Chapter 7 or Chapter 13 bankruptcy.

Filing for bankruptcy will affect your credit score based on what your score was before you filed.

However, filing for bankruptcy affects various score ranges differently.

If your credit score is in a good range before filing, it will nosedive quite a bit.

In contrast, if your range is within the fair or bad credit, the dip wouldn’t be so obvious.    

Collections

If you’re not paying your bills at the right time, your debt may slip into collections.

For instance, if you’re delinquent on a debt for whatever reason, such debt can be handled by a collections agency who will work round the clock within the law to recover such lost debt.  

Missed/Late Payments

Whenever you miss a payment on your loan, either personal or student, it will have a negative effect on your credit score.

So it is absolutely important that you set reminders to alert you to pay your bills at the right time.

With late payments, you may slip into a lower credit range that reduces your chances of obtaining credit at low rates.

If you default on your loan, it can reflect in your credit history for seven years.

Paying back as quickly as possible should be at the top of your priority list.

Closing cards with unpaid balances

It’s easy to assume that getting a credit card off your record is healthy for your score, but that’s not often the case.

As a matter of fact, if you have a substantial balance left on the card, closing it may have a significant impact on your credit score.

Since some parts of your score is based on the entire credit extended to you, removing the card from the mix also removes a significant part of credit granted to you as such damaging your score

Disregarding Financial Responsibilities

When you ignore lines of credit and loans, they will ultimately hurt your score.

So always remember that the only way unpaid utility, medical bills and cable can affect your score is negatively.

While many of these companies do not report for regular payments, once you become delinquent, it won’t take long for you to observe that your scores are crumbling.

If possible, you should set up payment plans with these companies to avoid a negative effect on your credit score.

For most of these companies, creditworthiness is enough to maintain a good score.

However, if you’re running into trouble with your bills, keep in contact with representatives.

What You Can Do To Improve Your Credit Score

Here are several things you can do to build your credit score:

Always Pay Your Debt On Time  

Paying all your debts on time is good for your credit score.

Paying on time will not only enhance your credit score but will also guarantee that your scores doesn’t crumble.  

Even more, paying your debt at the right time will trigger better interest rate credit cards and other significant perks credit offers.

You should set up alert for paying your bills so won’t forget in the frenzy of your day to day activities.

Lookout For Errors And Dispute Them

A recent FTC report disclosed that on the average 1 in 4 Americans have observed at least one substantial error on their report.

However, many of such people are yet to dispute credit report errors with the bureaus.

The process of disputing error is quite simple.

Once you identify an error on your credit report, review every other reports with the bureaus just to ensure you have all the data you need.

Next, you have to file a dispute about the error with the appropriate bureau online and follow up until the error is fixed.  

Keep Your Good Debt History

Do not make the mistake of removing any debt that has been on your credit report for long and has been paid at the right time and in full.

Old good debts and closed accounts are really good for your credit report and can boost your credit score by indicating your commitment to repaying your debt.  

Increase Your Credit Limit

When you increase your credit line, it boosts your credit utilization ratio (that’s the percentage of your utilized credit unit) which will in-turn enhance your credit score.

More often than not, you will get the option to do this with your credit card companies, and once you’re offered the chance, I strongly recommend that you don’t let it slip.   

Always Pay Your Rent On Time

In some cases, your rent can help you enhance your credit score.

In fact, paying your rent at the right time every month is almost as crucial as paying any other debt or bill.

Late rent payments can affect your credit score negatively.

You should ask your landlord if he or she submits to any of these credit bureaus TransUnionEquifax, or Experian.   

Use Different Types of Credit Accounts

Lenders are interested in your ability to handle several different types of credit accounts.

This is why your credit mix is one of the key components that make up your credit score.

So lenders have a positive impression about potential borrowers who have multiple credit accounts open.

Nonetheless, you shouldn’t open too many new credit accounts at once.

Lenders have a negative impression about multiple applications for credit cards.

Learn more: A Beginner’s Guide To understanding Credit Score.

How Your Credit Scores Are Calculated

There are three major credit bureaus (TransUnion, Equifax and Experian) responsible for creating credit reports and their scoring models are used by companies such as FICO and VantageScore to calculate a credit score that usually ranged from 300 – 850.

The three credit bureaus can as well calculate your credit scores based on their own proprietary models.  

Here are the metrics that are considered when calculating your credit score:

  • Credit history (payment history)
  • Credit mix
  • Number of inquiries
  • Credit utilization
  • Credit age

Your credit history and credit utilization make up 65% of your overall credit score.

As such, do your best to pay all your bills on time always and don’t let your credit utilization rise up to 30. If possible, keep it at 20%.  

Image Credit: WellsFargo

Interestingly, each of these metrics is your path to a poor or an excellent credit score.

Also, some factors aren’t considered when calculating your credit score.

Factors That Aren’t Considered In Your Credit Score

According to FICO, here factors that doesn’t affect your credit scores:

  1. The place you’re living
  2. Taking part in credit counseling groups/programs/seminars etc.
  3. Salary
  4. Access to public assistance
  5. Your age ( some sort of scores could consider this though)
  6. National origin, race  religion, or color
  7. Family/child support responsibilities
  8. Profession, employer and employment history
  9. Marital status
  10. Any information not seen in your credit report  

Why You May Have Different Credit Scores

Since there are three different credit bureaus that create credit scores, chances are you may end up with different credit scores at once.

For instance, you may have different credit scores if one of your lenders only report to one or two credit bureaus or submit updates to them at different intervals.

You may be amazed to learn that some lenders doesn’t report to any bureau at all.

While others only report to one or two bureaus. However, many lenders report to all three bureaus at the same time.

This is why your credit score on FICO might be different from the one on VantageScore.

So what’s the difference between the two major credit scoring models FICO and VantageScore?

FICO and VantageScore – Any Difference?

The three major credit bureaus – TransUnion, Equifax and Experian teamed up to establish VantageScore in order to come up with consistent credit scores among all three of them.

VantageScore has a 3.0 model which they claimed can score millions of people better than their competition by considering about 24 months of previous credit activities.

This includes rent payments and utilities when possible – this can actually create more credit opportunities for you.  

While VantageScore only boasts of three scoring models, FICO has more.

FICO (Fair, Isaac and Company) is a data analysis firm and they are currently the biggest name in credit score.  

However, both FICO and VantageScore considers similar factors when calculating credit scores:

  • Credit history (payment history)
  • Credit mix
  • Number of inquiries
  • Credit utilization
  • Credit age

While the score you get from both firms might be different, they are always calculated considering the information in your credit reports.

This is why it is absolutely important to check your credit reports regularly.

You can get your free credit score online on Credit Sesame or on CreditKarma.

Williams Oleije

Williams Oleije

Williams Oleije is an Inbound Marketer, and a pop culture enthusiast. He's an avid researcher about how digital media is transforming marketing in several industries.

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