What hurts credit score the most?

  • Posted on: 17 Jul 2024
    Credit Repair Blog, Credit advisor blog

  • Your credit score is a crucial three-digit number that lenders use to assess your creditworthiness. A good credit score can unlock lower interest rates on loans, better credit card offers, and even influence your ability to rent an apartment or get a job. Understanding what factors impact your credit score is essential for maintaining good financial health. While many things can affect your credit, some have a much more significant impact than others. This article delves into the primary factors that can hurt your credit score the most, helping you avoid costly mistakes and build a strong credit profile.

    The Biggest Offenders: Factors with the Most Impact

    Not all factors affecting your credit score are created equal. Some weigh more heavily than others. Knowing which ones to prioritize can help you focus your efforts on improving your credit where it matters most.

    1. Payment History: The King of Credit Scoring

    Your payment history is the single most important factor in determining your credit score. It reflects your ability to pay your debts on time, every time. Payment history accounts for approximately 35% of your FICO score, the most widely used credit scoring model. Even a single late payment can have a noticeable negative impact, and the more recent and severe the delinquency, the greater the damage.

    Why is payment history so important?

    • Lenders view it as a strong indicator of future behavior. If you've consistently paid your bills on time in the past, they're more likely to believe you'll continue to do so.
    • It’s a direct measure of your responsibility in fulfilling your financial obligations.
    • Late payments reported to credit bureaus stay on your credit report for up to seven years, impacting your ability to secure loans and credit cards for years to come.

    What counts as a late payment?

    Generally, a payment is considered late when it's more than 30 days past the due date. Some lenders may report late payments sooner, but the standard is 30 days. The severity of the impact increases the longer you go without paying.

    How to protect your payment history:

    • Set up automatic payments for all your bills to avoid missing due dates.
    • Use calendar reminders to ensure you're aware of upcoming payments.
    • If you're struggling to make payments, contact your creditors and explore options like hardship programs or payment plans.

    2. Credit Utilization: Keeping Balances Low

    Credit utilization is the amount of credit you're using compared to your total available credit. It's calculated by dividing your outstanding balances by your credit limits. This factor accounts for approximately 30% of your FICO score, making it the second most influential element.

    Why does credit utilization matter?

    • High credit utilization indicates that you're heavily reliant on credit, which can signal to lenders that you're at a higher risk of default.
    • Keeping your balances low demonstrates responsible credit management and financial discipline.

    The Ideal Credit Utilization Ratio:

    Experts generally recommend keeping your credit utilization below 30%. Ideally, aiming for 10% or lower can significantly boost your credit score. For example, if you have a credit card with a $1,000 limit, try to keep your balance below $300, and ideally, below $100.

    How to improve your credit utilization:

    • Pay down your credit card balances as much as possible, focusing on paying off the balances on cards with the highest interest rates.
    • Request a credit limit increase from your credit card issuers. A higher limit automatically lowers your credit utilization ratio.
    • Avoid maxing out your credit cards. This can have a drastic negative impact on your credit score.
    • Consider using balance transfer credit cards to consolidate high-interest debt.

    3. Public Records and Collections: Major Red Flags

    Public records and collections are significant negative marks on your credit report and can severely damage your credit score. These include bankruptcies, judgments, tax liens, and accounts sent to collections agencies.

    Bankruptcy: The Nuclear Option

    Filing for bankruptcy is a serious financial decision that can have long-lasting consequences on your credit. Bankruptcy remains on your credit report for up to 10 years, depending on the type of bankruptcy filed (Chapter 7 or Chapter 13). While it offers debt relief, it also signals a significant inability to manage your finances, making it difficult to obtain credit in the future.

    Judgments and Tax Liens: Legal Setbacks

    Judgments occur when a creditor sues you and obtains a court order for you to pay a debt. Tax liens are placed on your property by the government if you owe unpaid taxes. These public records indicate a failure to meet legal obligations and can significantly lower your credit score. Although recent changes to credit reporting have removed some tax liens and civil judgments, it's still important to address these issues promptly to avoid damage to your credit.

    Collections: Handing Over the Reins

    When you fail to pay a debt, the creditor may eventually sell it to a collections agency. Collections agencies are aggressive in pursuing payment, and the presence of a collection account on your credit report is a major negative factor. Even paying off a collection account doesn't automatically remove it from your credit report, although some "pay-for-delete" agreements are possible (but not always reliable).

    How to mitigate the impact of public records and collections:

    • Avoid situations that lead to bankruptcies, judgments, and tax liens by managing your finances responsibly and paying your debts on time.
    • If you're facing financial difficulties, seek help from a credit counselor or debt management agency before resorting to bankruptcy.
    • If you have accounts in collections, try to negotiate a settlement with the collection agency.
    • Check your credit report regularly to ensure the accuracy of public records and collections. Dispute any errors with the credit bureaus.

    4. Length of Credit History: Time Matters

    The length of your credit history accounts for approximately 15% of your FICO score. It reflects how long you've been using credit and demonstrates your ability to manage credit over time.

    Why is credit history length important?

    • A longer credit history provides lenders with more data to assess your creditworthiness.
    • It demonstrates your experience managing credit accounts and your consistency in making payments.

    How to build a longer credit history:

    • Avoid closing old credit accounts, even if you're not using them, as long as there are no annual fees. Closing accounts can shorten your credit history.
    • If you're new to credit, start with a secured credit card or a credit-builder loan to establish a credit history.
    • Become an authorized user on a responsible friend or family member's credit card. Their positive payment history will be reflected on your credit report.

    5. New Credit and Credit Mix: Diversification and Recent Activity

    New credit and credit mix each account for approximately 10% of your FICO score. These factors relate to the types of credit accounts you have and how frequently you're applying for new credit.

    New Credit: Avoiding Credit Seeking

    Opening too many new credit accounts in a short period can negatively impact your credit score. Each time you apply for credit, a hard inquiry is placed on your credit report. Multiple hard inquiries can lower your score, especially if they occur within a short timeframe. Lenders may interpret frequent credit applications as a sign that you're struggling to manage your finances.

    Credit Mix: Diversity Matters

    Having a mix of different types of credit accounts (e.g., credit cards, installment loans, mortgages) can demonstrate your ability to manage various types of debt responsibly. However, the impact of credit mix is relatively small compared to other factors like payment history and credit utilization.

    How to manage new credit and credit mix:

    • Avoid applying for too many new credit accounts at once. Space out your applications over time.
    • Only apply for credit when you genuinely need it.
    • Aim for a healthy mix of credit accounts, but don't open new accounts just for the sake of diversification.

    Other Factors That Can Indirectly Affect Your Credit Score

    While the factors listed above have the most direct impact on your credit score, other factors can indirectly influence your creditworthiness.

    • High Debt-to-Income Ratio (DTI): While DTI isn't directly factored into your credit score, lenders consider it when evaluating loan applications. A high DTI (the percentage of your monthly income that goes towards debt payments) can make it more difficult to get approved for loans or credit cards.
    • Inaccurate Information on Your Credit Report: Errors on your credit report can negatively impact your credit score. Regularly review your credit report from all three major credit bureaus (Equifax, Experian, and TransUnion) and dispute any inaccuracies.
    • Frequent Credit Report Monitoring: While checking your own credit report doesn't hurt your credit score (these are considered "soft inquiries"), excessive hard inquiries from lenders can lower your score.

    Protecting and Improving Your Credit Score: A Proactive Approach

    Maintaining a good credit score is an ongoing process that requires discipline and attention to detail. By understanding the factors that affect your credit score and taking proactive steps to manage your finances responsibly, you can protect and improve your credit health.

    • Monitor Your Credit Report Regularly: Obtain free copies of your credit report from AnnualCreditReport.com and review them for errors or signs of identity theft.
    • Pay Your Bills On Time, Every Time: Set up automatic payments or calendar reminders to ensure you never miss a due date.
    • Keep Your Credit Utilization Low: Aim to keep your credit card balances below 30% of your credit limits.
    • Avoid Maxing Out Your Credit Cards: Maxing out your credit cards can severely damage your credit score.
    • Don't Apply for Too Many New Credit Accounts at Once: Space out your credit applications to avoid excessive hard inquiries.
    • Maintain a Healthy Mix of Credit Accounts: Diversify your credit portfolio with different types of credit accounts.
    • Address Any Negative Marks on Your Credit Report: Negotiate settlements with collection agencies, dispute inaccurate information, and seek help from a credit counselor if needed.


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