Your credit score matters a lot, especially when you're trying to apply for a loan. In many cases, a low credit score can lead to the rejection of your loan application. So, it's very important to know the factors that could be bringing down your credit score and what you can do about it.
1. Poor Payment History
Your payment history is the biggest factor when it comes to determining your credit score. This is because it's how lenders can determine how responsible you are when it comes to handling money. If you have a history of missing or being late with payments, it's a surefire way to negatively impact your credit score.
According to the Fair Isaac Corporation (FICO), you should pay your bills on time to avoid hurting your credit score. The FICO believes that you should pay any balance that's less than $100 in a reasonable amount of time, as well as any balance that's more than $100 within 21 to 30 days.
2. High Credit Utilization Ratio
It's important to know that your credit utilization ratio is considered one of the most important factors in calculating your credit score.
The credit utilization ratio is defined as the amount of your credit limits that are being used. In other words, it's the ratio of the balance of all your credit cards against your credit limits.
Now, the ideal credit utilization ratio is 30 percent or less. What does this mean? It means that if you have $5,000 available on your credit cards, you should owe no more than $1,500. This is very important because it could significantly affect your credit score, as having too much credit you don't use is a bad thing.
And while you might be wondering how it can affect your score negatively, it's not hard to figure out. If you let your balances get very high, it can suggest to lenders that you're overextended and that you might be a risky borrower.
3. Short Credit History
If you have a short credit history, it's possible that your credit score won't be as high as someone who has had a long credit history. In fact, if you have a history of not using credit cards or loans, you may find that it's hard to obtain a loan.
The reason for this is that lenders need to know if you're likely to be able to pay back the loan. If your credit history is longer, it will show that you've used credit in a responsible manner, which is exactly what lenders want to know.
However, it's important to remember that having a short credit history isn't necessarily a bad thing. For example, you could have had bad credit in the past, or you may just be a young adult who is starting to build your credit for the first time.
The thing to keep in mind here is that even if you have a short credit history, you can still improve it. If you pay your monthly bills on time and avoid taking out more loans, you will be building up a good history of responsible credit use which will help improve your credit score.
Knowing the factors that can negatively affect your credit score is key to understanding why your credit score might not be as high as you'd want it to be. Because of this, you can begin to repair your credit and improve your credit score over time.
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