5 Things Negatively Impacting Your Credit Score

Your credit score is one of the main pillars of your financial health. This number can influence many things in your life, from interest rates on loans to renting an apartment, and maybe even landing a job. Understanding key items that can impact your credit in a negative way is crucial for maintaining good financial health. Here are five common factors that could negatively impact your credit score.

1. Late Payments

Missing a payment, or even making a payment late, is one of the most damaging factors to your credit score. Not only are they damaging, but they can have a lasting effect. Lenders and credit bureaus evaluate your timeliness of payments as a key indicator of how financially responsible you are. If you can’t make a payment on time, or at all, you signal a lack of responsibility. A single late payment can last up to seven years on your credit report.

Luckily there are many ways to avoid this issue, such as calendar reminders in your phone or automatic payments if you know the funds will be available. If it’s your first missed payment, it’s worth asking if the lender will make the exception of reporting it. They may be lenient for a first time offender.

2. High Credit Utilization

Credit utilization is calculated by determining what percentage of your credit limits is currently being used. If you’re using a high percentage of your available credit, it may signal that you’re overextended financially. This can be a large red flag and impact your credit score negatively. Ultimately, the lower the utilization rate, the better. If you can keep it around 30%, you may be viewed more favourably by potential lenders.

If you’re nearing, or have already exceeded this credit utilization rate, consider paying off existing balances before spending more. Ultimately, proving you don’t need to max out your credit can positively impact your credit.

3. Inaccurate Information

Unfortunately mistakes on your credit report are not unheard of, and can seriously impact your credit score. Inaccurate information may include outdated balances, incorrect account details, and even fraudulent activity. Although you may be unaware of them, they can significantly impact your financial standing. It’s essential that you check your credit reports regularly to be aware of any errors and dispute them immediately.

You can easily request your credit report from Equifax or TransUnion to review for errors to ensure everything lines up. Additionally, if you’d like further coverage to help review and dispute errors you can explore services such as our partner, CreditVerify. You don’t have to be alone in understanding and disputing any inaccuracies that may arise. But the longer they may stay that way, the harder they may be to correct.

4. Too Many Credit Inquiries

Every time you apply for a new credit card, loan, mortgage, etc. the lender conducts a hard inquiry on your credit report. While a single inquiry may not impact your credit score, multiple inquiries in a short time period can be a red flag. Lenders may consider this behaviour as an indication that you’re a high-risk borrower always searching for credit. While this dip in your credit may be more temporary, it can still have a negative impact on your credit score. It may also make it harder to get approved for new credit.

To avoid this issue, considering some of the following:

Only apply for new credit when it’s absolutely necessary
If you’re exploring different options on a loan (such as a mortgage or auto loan), try to do so quickly as many inquiries of the same type may be lumped together as one instance
When considering a new personal loan, try a loan search engine like LoanConnect where you can see your options first by only allowing a soft credit check that won’t impact your credit

5. Items in Collections

If you have a credit card or loan that you’re not making any payments on over a long period of time, the lender may send it to Collections. This is a significant red flag on your credit report and may impact your credit score greatly. Items in Collections may stay on your credit report for up to seven years, causing a long term challenge to rebuild.

If you have an item sent to Collections, take action to resolve it as soon as possible. It may be possible to negotiate a payment schedule or work on a payment plan to mark your outstanding credit as “paid” sooner. Even though it won’t remove the red flag completely, it shows responsible action to potential future lenders.

Looking for a little more information on Collections? Read more here.

Conclusion

Your credit score can take a long time to build, and a short time to ruin.

A strong credit score can open doors to better financial opportunities, and lower payments and is worth protecting. To maintain, or improve your credit score, stay on top of your payments, keep your credit utilization low, check regularly for inaccuracies, avoid excessive inquiries, and handle collections issues immediately. By being proactive instead of just reactive, you can work towards healthier credit. And ultimately, a more secure financial future.

Looking for further information on how to build, protect, or repair your credit score? Read our additional blogs here: