Recently on our bankruptcy forum a user asked, “I applied for a home loan and found out my FICO score is low. I was a bit surprised. I know I need to improve it so I can get a better interest rate on my loan. Can you tell me what the main issues are that have potentially lowered my credit score?”
There are a variety of financial actions that can severely lower your credit score. Let’s review the top five:
- Paying bills late
Payment history accounts for 35% of your credit score. For this reason, paying bills late is one of the main actions that will lower your credit score. Not only does paying your bills late potentially suggest that you are an unreliable and irresponsible borrower, it is also a red flag to lenders who might be considering loaning you money.
Additionally, late payments are reported to the credit bureaus, thus reducing your credit score, and can lead to to a denial of credit or higher interest rates to borrow money.
Note: credit bureaus are generally notified for bill payments which are 30 days late. Unfortunately, a notice of late payment can remain on your credit report for years.
- Utilizing too much of your available credit.
Credit utilization accounts for 30% of your credit score. What is credit utilization? It’s the ratio of your credit card balance to your available credit limit. If you have several credit cards which are maxed out this is a warning to lenders that you could be in financial crisis.
- Requesting New Credit Cards
The age of your credit can also impact your credit score. In fact, 15% of your credit score can be impacted by the age of your oldest credit card account and the average age of all of your credit card accounts.
Additionally, your credit score may also be lowered if you open a new credit card and an inquiry is placed on your credit report.
Property repossessions can remain on your credit report for seven years from the date of the delinquency of the original loan. Although you might be able to offset the negative effects of a repossession by making other smart financial decisions, repossessions will lower your score.
Some borrowers may decide to voluntarily surrender possessions rather than forcing the creditor to repossess them. While this may be better for the lender, it will still lower your credit score and will indicate you were not able to meet your financial obligations.
- Filing Bankruptcy
It’s important to note that if you have good credit and you file for bankruptcy, not only will the bankruptcy filing remain on your credit report for seven to ten years, it will significantly lower your credit score.
The truth, however, is that most people who file for bankruptcy already have a very high debt to asset ratio and they may have already stopped paying certain bills. In this case, their credit score might take a slight dip but most likely it’s already very low
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