What Lowers Your Credit Score?

Introduction

Having good credit is a game changer. Not only does it make it easier to qualify for a credit card or loan, but a good credit score can also help you with major purchases or even getting a job.

Maintaining a solid credit score requires diligence. And there are specific steps you can take to ensure that it’s in a good place.

But first, it's important to understand exactly what a credit score is and how it works.

What Is a Credit Score and Why Is It Important?

Your credit score is a three-digit number that represents your creditworthiness to lenders. There are several types of credit scores, with two of the most popular credit scoring models being FICO^® and VantageScore^®. And credit scores typically fall within a range of 300-850 — the closer you can get to 850 the better.

This number is important because credit issuers use it to decide whether they’ll give you credit and what interest rate to charge. If you have a higher credit score, you’ll be seen as a better risk. And vice versa.

And getting more credit isn’t the only time your credit score comes into play. Other situations may include when a landlord is determining whether to rent you a place to live, when an employer is thinking about hiring you for a job, or when you’re buying a new car.

What Are the Factors Taken Into Consideration When Calculating Credit Score?

We know what a credit score is and why it’s important. But what factors actually go into calculating those precious three numbers?

1. Payment history – Making up 35% of your FICO score, your payment history holds the largest impact on your credit score.

2. Credit utilization and debt – Your credit utilization rate (CUR) is the ratio of your utilized credit to available credit. In other words, it’s a measurement of how much of your credit you’re actually using. And it makes up 30% of your FICO score.

3. Average age of credit – Accounting for 15% of your FICO score, the longer your credit history is — assuming it’s a good history — the better.

4. Requests for new credit – Opening new lines of credit can cause a ding on your score, and it accounts for 10% of the equation.

5. Assortment of credit – Your ”mix“ of credit — such as credit cards, a mortgage, and other loans — constitutes 10% of your score.

Factors That Lower Your Credit Score

Now that we know what goes into calculating your score, we can deduce what actions can make it go down.

1. Making late payments – Payment history is the most important factor when calculating your credit score. While one late payment may not harm it too badly, being late multiple times can have a major negative impact.

2. Using too much credit – How much you owe in relation to your credit lines plays a critical role in determining your CUR and, in turn, your credit score. Experts recommend keeping your CUR below 30%.

3. Applying for too many cards – Each application for a credit card is a hard pull — or hard inquiry — on your credit report, which can lower your score by a few points.

4. Closing an account – Not only does closing an account reduce your available credit, but it can also shorten your credit history.

How To Avoid Lowering Your Credit Score

So if the four factors listed in the previous section can lower your score, how can you avoid them?

Always pay your bills on time

If you think of your credit as a building, then your payment history would form the foundation. By making at least the minimum payment due month in and month out, you’ll form a strong credit foundation upon which you can build.

Avoid maxing out your credit accounts

Although this may seem obvious, think about it in terms of your CUR. If your debt has increased without your available credit changing, you’re now using a higher percentage of your credit, making it more likely that your score will decrease.

Try not to open too many accounts at once

While new credit could help lower your CUR, remember that each time you apply for a new card, a hard inquiry is made. And each hard inquiry can lower your credit score a few points.

Avoid closing accounts you’ve kept in good standing

By keeping good-standing accounts open, you’re extending your history of using credit in the eyes of most scoring models. Most closed accounts eventually drop off of your credit report and are subsequently no longer factored into calculating your credit score.

By contrast, an open account with a lengthy history is what most credit scoring models tend to favor. Additionally, by not closing your accounts, you’re also keeping the sum of your available credit larger, which contributes towards lowering your CUR.

Bottom Line

These are just a few suggestions on how to strengthen your credit score and prevent it from declining. It’s important to always know where your score sits and to strive to improve it.

If you’re looking for a new credit card, see if you pre-qualify for a Credit One Bank offering, which doesn’t affect your score.