What lowers my credit score and how can I repair my credit?
You probably know how important your credit score is when you’re applying for a loan. But do you know exactly what lowers your credit score?
With all the contributing factors that lower a credit score, that number might come as a shock when you check what your score actually is. Still, as a consumer or small business owner or even if you are running a medium to large business, it’s crucial to keep your personal credit score as high as possible. Whether you need to replenish your stock, do a home renovation, or simply have access to a source of working capital or car loan, it’s very likely that you’ll need some form of financing to run your day to day life or business. And if you don’t have your score at an acceptable level, you could have trouble moving forward financially or even growing your business, or buying your dream home.
That’s because lenders look to your credit score as an indication of your reliability and behaviours as a borrower. Responsible credit holders that pay their loans on time will be easily identified with the repayment history indication system. ( RHI ) This is now a mandatory system that the lenders must use to report your repayment behaviour. You might be lead to believe by this that if you pay your loans in advance that you will receive a better credit score. This is not necessarily the case. So long as you make the repayments on time, (note: there is a 14 day grace period ) you will not be reported with a late repayment.
This isn’t to say that you’re irresponsible if your credit score is low—many borrowers make late payments for various circumstances that are occur beyond their control. And if you’re handling many types of debt, you might have a tough time staying on top of all your loan payments. It is important that you manage your budget and direct debits so that this is less likely to occur. If you are foreseeing that there could be an issue for an ongoing repayment, contact the lender and advise them of your situation and keep a record of the call or email correspondence including any documents that you may complete or provide.
So what lowers your credit score, and how can you avoid these things? Consider this list of eight things that lower credit score a reminder of what not to do. You’ll keep your credit score high—and eventually get the best deal possible on your loan.
What Your Credit Score Is, and Why It Matters: A Quick Rundown
Your credit score is a numerical indication set by algorithms by the three credit reporting bureaus individually of your history with loan applications and open and closed accounts. There are three separate credit scores, Equifax is the most common scoring system. The banks and lenders will also more likely to be checking your Illion credit file and score also. It is important however, to ensure that your score with all the three credit bureaus are kept in good order.
Three major credit bureaus measure your credit score: Equifax, Illion and Experian scores have been more widely relied upon in recent times , and they’ve made some changes to their scoring systems along the way.
Scores range from 0 to 1200 It is possible to get a perfect credit score, however very rare. Generally, the health of your credit score is quantified (and qualified) like this:
Beware that all three of the major credit bureaus might have slightly different information on consumers and weigh factors differently. So don’t be surprised if your credit score fluctuates slightly across your credit reports.
What determines your Personal Credit Score?
Even though you might not be able to predict your exact credit score, there’s no reason to feel like you’re totally in the dark, controlled by a mysterious system. You can control the outcome of your credit score—at least a great majority of it. We Fix Credit offers personalised credit fix solutions that can help you with your credit repair
Specifically, you can count on credit bureaus weighing the following five factors to calculate your score, plus the approximate percentage of your score they’ll account for. I’ll also tell you a little bit about what these factors entail, so you can know exactly what lowers your credit score in each of these categories to keep your credit clean and maintain a high credit score.
- Payment History
- Timely repayment across all types of credit
- Late repayments how recently they occurred, how long they are overdue, and how many overall late payments are on your record
- Bankruptcies, Part 9 debt arrangements and court actions
- Credit Utilisation
- Balance owed compared to available credit
- How much debt is still owed to lenders, across all types of credit
- Age of Credit History
- How long it’s been since credit accounts were opened
- How long it’s been since a repayment was brought to date
- New Credit
- Opening new accounts
- Amount of recent enquiries
- Amount of time since your most recent enquiry, and the type of enquiry
- Credit Mix
- Number of credit accounts you have, including credit cards, loans, retail accounts, and consumer finance applications and payday loans (short term small personal high interest loans)
- Types of credit accounts you have, meaning revolving credit accounts or debt collection accounts.
Some more Contributing negative factors are;
- Existing home loan or home loan applications
- Late payments of 60 days
- Consumer payment defaults
- Multiple applications for loans in a short period of time
Before applying for a loan, it’s a good idea to check your credit scores. That way, you’ll have a better idea of which types of loans and loan terms you’ll be qualified for, and you can adjust your expectations accordingly.
What are score key contributing factors that can lower my score?
Now that I have explained what makes up a credit score, Ill be more specific about what lowers your credit score. These eight actions are sure-fire ways for you to negatively (and, in some cases, severely) impact your credit scores.
- Applying for too many credit cards or loans in a short period of time.
But be cautious about applying to too many credit cards and unsecured personal loans all at once. A lender will always check of your credit report before extending you a line of credit or any other type of loan, and any enquiry will cause a small dip in your credit score for a period of time. But the enquiry will stay on your report for five years, regardless of whether the lender decides to extend you that loan or not.
In fact, any activity that requires an enquiry will lower your credit score, and with of these enquiries you may not realise you were even applying for a finance facility. In some cases you may not have even been approved for this facility, however the enquiry remains for 5 years on your credit file. Other activities that might require enquiries include, extending your line of credit, getting a mobile telephone or device, electricity or gas account or getting a store card that delays your payment increments. (such as ZIP pay or Open pay)
2. Paying your loan bills too late.
According to finder.com, across the states and territories the average Australian’s credit score is at 692, considering most lenders want you to be around 680+, that’s even more reason for Australian consumers to stay diligent about paying their bills on time—because the more open credit you have , the more late payments risk you have that can cause your score to drop. And if you default on your loan, of course, you’ll also be incurring the wrath of late payment fees and increased interest rates.
Lenders might forgive a late payment (up 14 days overdue), but consecutive late payments over 14 days will definitely hurt your score. And a late payment that exceeds 180 days will have the biggest impact on your score. Plus, it’ll stay on your record for two years.
Keep in mind that this applies for late credit card payments and other types of loans, like personal loans, mortgages, and auto loans. Late payments on a loan may or may not lower your credit score. It really depends on the lender you’re working with and the type of loan you have, Its now a legislative requirement for most major banks and lenders to record late repayment history so it’s best to contact your lender directly if you’re worried about making your payments on time. By doing this they are required to not list your repayments whist you are in financial hardship. If they still do this, you can contact We Fix Credit to rectify the situation for you so that your credit score is not impacted negatively and it can be corrected.
- Defaulting on a loan.
The difference between an RHI and a default is mostly a matter of time. An overdue payment or credit default is when a borrower fails to repay their bill for about 30-90 days. Defaults will lower your credit score, but they can be cleared up with our assistance at We Fix Credit.
Depending on the lender and the type of loan, the length of time at which a loan is defaulted Usually, it’ll be at some point over 90 days. The lender is required to give relevant notifications sent to the last know address in order for you to have the opportunity to remedy the default prior to it being listed as an ‘overdue payment’ on your credit report. These notices are formally known as a 21D and a 6Q notice. They are a legislative requirement under the Privacy Act 1988 and the Credit Reporting Code of Conduct.
As you can guess, the repayment history indicators can be much harder to rectify that a credit default, as the RHI is a legislative requirement and can only be lifted if there was a clear error by the lender or a miscommunication of hardship. The consequences are just as serious as your RHI makes up around 35% of your credit score. If the defaulted loan is collateralised, for instance, then the lender can seize your security in accordance with your loan agreement.
Your credit score takes a serious hit if you default on your loan. It’ll stay on your record for five years, which can prevent you from securing loans in the future. At We Fix Credit we can explore your options and in most cases have your credit file repaired. Our credit repair service is a streamlined and efficient process that can increase your credit score and remove your adverse credit listings to get you back on track and on the way to getting your credit report looking tip top again.
Another potential outcome of a defaulted loan is a ‘Serious Credit Infringement’ which is when you’re so late in your payments that the lender no longer deems you contactable or that you may have no intention of meeting your loan agreement. You’ll still owe that money, and the bank might send a collection agency out to get that money from you. Obviously, a Serious Credit Infringement has a serious impact on your credit score, however after the debt is repaid it’ll downgrades on your credit report from seven years to five years as a normal credit default term unless you have your credit file repaired in which case it will be completely removed.
The reality is, lenders don’t want to punish you for being behind on your loans any more than you want to be punished. So if you think you will become late contact them or the lender will reach out to you to find out what’s going on eventually. And they might be able to find a way to help you out, such as offering adjustments to your payment plan. If you suspect that you won’t be able make your payment on time, you should always try to contact your lender directly—before the possibility arises that your credit score will take a hit or if you receive a 21D Notice and 6Q notice in the mail, take it seriously.
- Not using your new credit card.
With so many types of credit on the market, it can be dangerously easy to sign on for a card for example that you think you need, but that, in reality, ends up languishing in your desk drawer or you might be tempted to use it for an impulse purchase.
But unused cards and loans might lower your credit score, mostly because that loan poses a giant question mark. Without spending information, the lender can’t assess your level of financial responsibility. Opening new accounts also decreases the average length of your credit history, which is another key factor that the credit bureaus take into account in calculating your credit score.
So, to protect your credit score, only sign up for new loans that will serve your financial needs, and that you’ll regularly use and that can keep repayments on time.
- Using your credit card toomuch.
Your credit spending habits is much more important to your credit score than the spending limit you have on that card. In reality, the credit bureaus don’t care about how much money you have to spend—they care about how well or poorly you manage that credit facility.
As a general rule, your credit card balance shouldn’t exceed one-third of your credit limit. Any more than that, and the potential lender might think you’re overly dependent on your credit card. Maxing out your credit card is a red flag, because it indicates to the lender that your ability to repay your debt and might not be able to keep up with your spending habits. You don’t want to appear to be living beyond your means.
- Not checking your credit report.
Reading over your credit report might not make for the most riveting literature, fair. Still, it’s important to regularly check up on it to make sure all that information is in order. In other words, that all the information on the report is actually associated with your actions.
It’s possible that a lender reported a something incorrectly. It’s also possible that suspicious activity is the result of identity theft. Either way, it’s vital that you report incorrect information to the credit agency so they can look into the source of that error and amend your score accordingly. And if it looks like a lender misreported information, you can dispute that error with the lender itself, and if you get stuck we are here to help.
All three credit bureaus give you one free credit report every three months, and experts recommend checking one report from each credit bureau at least every three months. That way, you’ll check your credit score four times per year, checking all three credit bureau’s at the same time.
It doesn’t hurt to check even more than that, and don’t worry about the effect on your credit score. When you request your own credit report, the bureau performs a check on your behalf, which, unlike a credit enquiry won’t impact your score negatively.
- Cancelling your credit cards.
Cancelling a credit card can affect a few factors of your credit score, and eventually can increase your credit score. First of all, eliminating a line of credit decreases your overall open credit balances, so you’ll probably have to decrease your spending on your remaining card accordingly. Remember that your balance shouldn’t (as a general rule) exceed 30% of your available limit on any given card.
Obviously, there are times when cancelling credit cards is a good idea, like if you’re consistently overspending and need to eliminate the temptation, or if a card’s high annual fee isn’t justified by its rewards and perks. It’s easy to be tempted to sign up for a credit card when there are so many various incentive programs available on the market, however these incentives may not be worth it in the end.
- Using your credit card for extra-large purchases.
We know how tempting it is to charge purchases worth several thousands of dollars onto your credit card. After all, one of the great things about credit cards is how easy they are to use in store and online.
But keep in mind the rule of 30:, it’s best to keep your balance below 30% of your card limit. That means that one giant purchase might considerably bump up your balance and your credit ratio, and lower your credit score. And in addition to the potential hit to your credit score, payments on that big purchase accrue interest from month to month decreasing your overall serviceability.
What Lowers Your Credit Score, and How Not to Do It
Your credit score is a crucial factor of your loan application, because it conveys to lenders how well or poorly you’re able to manage your debts. Plus, most lenders credit criteria’s have a minimum credit score requirement to be eligible for that loan at all. Your credit score will give your lenders insight in determining your loan approval.
Now that you know what lowers your credit score, it may seem tough to keep your credit score in order. But these are some major things not to do if you want to keep your credit score strong:
- Apply for lots of credit cards and loans at the same time, particularly unsecured short term loans.
- Pay your loan or pay utility bills late.
- Miss your repayments for so long that your loan goes into default.
- Max out your credit card.
- Ignore your credit report, and miss potential score-damaging errors, if you see something that needs to be corrected We Fix Credit can help you.
- Charge massive purchases to your credit card. You might need to find a better finance facility alternative than a high interest credit card.
Here’s the main thing to keep in mind: The worst thing you can do to your credit score is not pay your loans or bills on time. And the longer that missed deadline passes, the more RHI’s are noted that will lower your credit score. So stay on top of your bills and use your credit cards mindfully.
All in all, We Fix Credit can provide you with credit fix solutions that can assist you should you identify anything that may need to be corrected or repaired before applying for your loan. Being mindful of the above is important to maintain your credit score, however if you are checking your credit reports and credit scores regularly and keep on top of your credit health then you will have more opportunities available to you when you want to borrow. Your clean credit is your ticket for these opportunities.