Your credit score is a vital cog in the wheel of financial stability. Not only does it define your creditworthiness, but it also plays an important role in making a deal with your next lender.
While it is a well-known fact that defaulting on credit payments leads to a deterioration of your credit score, there are also a few other things to consider.
This article shares four things that can negatively play a role in determining your final FICO score. If your payments are prompt and your score is still dropping, check out this guide to see if any of these factors are affecting your score.
1. Credit Utilization
Even though companies are always ready to give you more credit power or increase your limit, they do not really want you to use that limit. If you are using your credit limit to its full limit, it sends a red flag to creditors and makes them think that you are too dependent on the credit.
This behavior follows you even if you’re keeping up with the payments. Credit utilization is weighted at 30% for calculating credit score, so it’s very important to manage the amount of credit you’re using.
2. Credit Age
Credit age is also a defining factor that can negatively affect your score. The older the credit account is, the better the credit score will be. The newer the credit account is, the lower your credit score will be.
The rationale behind this structure is that an older credit account has more stability and repayment history. Younger credit age means that the individual has recently acquired a new card or they may have made mistakes in their past accounts.
Other than this, credit age is evaluated by the age of the oldest account, and the average credit age calculated after combining your accounts.
3. Asking for Credit Repeatedly
Every time you apply for a new credit product, the lender does a credit check, which lowers your credit score. If you frequently apply for credit products from different creditors, the credit checks can have a very negative affect on your score.
Applying many times gives the impression that you have asked for credit multiple times from different vendors, but have not been approved. So, in the lender’s eyes, your profile becomes a risk, which they do not wish to bet on.
4. Not Having a Credit Mix
Credit mix symbolizes your ability to handle several credit accounts. Credit mix has a 10% weightage for identifying your credit score. FICO states that account holders that have a good credit mix are not considered as much of a risk by lenders.
On the contrary, not having a credit mix can affect your score negatively, as it also shows your inefficiency to handle credit.
Also, do not get confused with handling various accounts and applying for different credit accounts. While credit mix is the indicator of your efficiency to handle credit, applying for several credit limits shows an inability to get credit lines from lenders.
Conclusion
These are three most important factors that can negatively affect your credit score. Lenders are always happy with the accounts that are an asset to them and not a risk.