Reasons for Low Credit Score
A credit score is vital because it depicts a measure of your financial standing. If you were to approach any financial institution, seeking a line of credit, you would be assessed for your creditworthiness based on this score. A credit score above 750 is good, and anything below it is an indication that your credit score is a poor one.
There are many reasons for a low credit score. Given the many advantages which come with a high credit score, you may want to consider evaluating these reasons in your case and identify what is contributing to the low score to correct it eventually.
Given below are some reasons why you may have a low credit score.
You may be managing your incoming and outgoing money matters as per your convenience, but in doing so, you may be meddling with your credit score big time!
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If you have taken any loan or credit card and make payment of its installments later than their due dates, your credit score will bear the impact of this delay. Defaulting on your credit payments is an even more significant blunder which further brings down the credit score.
This is why, if you make it a point to commit a delay in payments of your credit facilities, your credit score is undoubtedly going to make the dip for it. Being inconsistent and irregular with your payment schedule may also cast the same impact on your credit score.
Taking Multiple Lines Of Credit
Are you running installments on multiple loans at the same time? If so, then there is no surprise why your credit score may be low. Taking multiple loans implies that you are heavily dependent on external credit for running your finances, and this does not show a healthy or positive image of your financial position.
Taking multiple loans also increases the quantum of debt on your head, which makes it challenging to keep track of the repayments. Missing any one of them has the potential to cast an impact on your credit score. Similarly, taking too many credit cards does the same damage to the credit score. In this case, it can beneficial to remember that credit card balance transfers can save you money.
Increasing Credit Utilization Rates
Often, people fall under the illusion that merely making payment of their credit card dues on time will keep their credit score under check. This is not entirely true.
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You may be making complete payment of the due amount of your credit card bill, and you may be doing it on time, yet, if you are utilizing up to 40 to 50 per cent of the credit limit sanctioned to you, it will amount to higher credit utilization by you.
When this happens, the overall credit score tends to fall since it is always regarded that a good credit utilization ratio should not exceed 35% of your sanctioned credit limit.
The idea is to keep the credit utilization limit at a bare minimum. If you are utilizing a lot of your credit limit to make payments of your dues, it is considered that you are not capable of paying back dues on your loans.
Keeping The Wrong Proportion Of Loans In Our Portfolio
Without the right mix of loans in the portfolio, your credit score is more likely to suffer. Thus, you should have an optimum combination of secured and unsecured loans in your credit portfolio. Keeping only unsecured loans in your portfolio is an absolute blunder for your credit score.
Unsecured loans depict mismanagement on your part pertaining to your finances. This is why it is essential to maintain a considerable balance between secured and unsecured loans.
Applying For Numerous Lines Of Credit In One Go
If you submit a new application to obtain loans or credit cards to multiple banks in one go, you are most likely to make your credit score suffer. This happens because each such potential lender will make an enquiry into your credit history to assess if you should be granted a loan or not.
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In turn, each of these hard enquiries gets recorded and implies only one thing. Your credit hungry nature could deter the health of your credit score and result in a decrease in the same.
To top it off, if you do end up getting any credit through one of these lenders, it will only increase your debt burden, which will adversely impact your ability to pay back the same.
It is also possible for wrong information to be included in your credit report, due to an administrative error or oversight of facts. This can also happen in response to fraudulent activity in your name.
Even though there is no fault on your end, you could still end up having a low credit score which will, unfortunately, signal to future lenders that you are not a likely candidate for extending credit facilities.
If you happen to come across an issue with your credit report, you can bring it to the notice of the appropriate authority to get it corrected.
Settlement Of A Debt
You may be motivated to settle your debt at specific terms due to many reasons. However, it is not the best resort when you can clearly make payment of your debt in full. Even though a settlement may reduce your debt burden by a certain amount, it will definitely reflect badly on your credit score.
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Any lender will only get the idea that you are unable to pay off your debt, which is why you may have sought to settle it. Only use this option as a last resort.
Having a low credit score reflects poorly on your financial reputation. It can cost you a good line of credit when you need it the most. Thus, it is vital to maintain a perfect score so that you stand firm in front of lenders. Therefore, keep in mind to pay your credit card bills on time
Even if your credit score has fallen due to one or more reasons, always try to seek remedial measures to bring it back up.