6 Top Factors that Affect Credit Score Negatively

byPriyanka JuyalLast Updated: March 13, 2024
6 Top Factors that affect Credit Score Negatively
6 Top Factors that affect Credit Score Negatively

Having a good credit score can give you various benefits as a borrower, such as the ability to negotiate better loan terms, the ability to secure larger loan amounts, priority over other applicants with lower credit scores, and lower interest rates. On the other hand, a low credit score can lead to the rejection of loan applications and higher interest rates. Therefore, it is important to understand the consequences of having a bad credit score and the factors that can negatively impact it.

What are the Factors that affect Credit Score Negatively?

Given the significance of credit score to an individual’s creditworthiness, it is essential to address any factors that may negatively impact credit score. If left unresolved, these factors can create a vicious cycle of loan application rejections, hard inquiries, and further deterioration of credit score. To be aware of and avoid these factors, here are some common factors that can have a negative impact on credit scores:

1. Irresponsible Payment History

  • One of the major factors that negatively impacts credit score is a history of irresponsible credit repayment.
  • This demonstrates a borrower’s inability and irresponsible behavior towards paying loan EMIs and credit amounts.
  • It may take years to improve/regain credit score in such cases.

Solution:

  • It is recommended to pay debts on time.
  • If a borrower is unable to manage credit payments for any valid reason, they can contact the concerned authorities and request a grace period.

2. High Credit Utilization Ratio

  • It is recommended to use only 30% of the total credit amount.
  • Using more than this percentage demonstrates reliance on credit, which results in a lower credit score.

Solution:

  • Borrower should use the credit utilization ratio judiciously.
  • If the borrower’s credit requirements are higher, they can contact relevant lenders, banks, or financial institutions to request a higher credit amount.
  • However, the use of only 30% of the credit utilization ratio is still applicable on larger credit amounts.

3. Unpaid Credit Amount

  • Late, missed, unpaid, or partially settled credit payments all result in a lower credit score.
  • Such payments are reflected in the credit report and can hinder the loan or credit card approval process.

Solution:

  • It is a good idea to set reminders for loan EMIs and credit payment due dates.
  • If the borrower has an outstanding credit balance, the outstanding amount can be converted into simple EMIs to avoid becoming overburdened.
  • If a borrower prefers to pay by check, they should make sure to deposit the check a few days before the due date.

4. Credit Report Errors

  • A credit report is a collection of a borrower’s credit history and credit repayment behavior obtained from banks, lenders, and financial institutions.
  • Any error, issue, or comment on a credit report can significantly impact a borrower’s credit score.

Solution:

  • If there is an issue or error in the credit report, it is important to file a dispute with the concerned authorities as soon as possible.
  • It is also recommended to review credit reports at least twice a year.

5. Hard Inquiries

  • Lenders conduct hard inquiries whenever a borrower applies for a new loan or credit.
  • These inquiries show the borrower’s multiple attempts to obtain a loan or credit card over a specific time period.
  • Frequent hard inquiries significantly impact credit score and can lower it.

Solution:

  • Borrowers should avoid making multiple credit inquiries, at least within a certain time frame.
  • It is advised to wait before applying for another loan.

6. No Credit Mix

  • A borrower’s inability to maintain a balance between secured and unsecured loans can also result in a negative credit score.

Solution:

  • A good credit mix is a healthy balance of secured and unsecured loans.
  • A borrower should figure out how to manage both types of loans or consult with an expert for more information.

How to Improve Credit Score?

There are several ways to improve your credit score, but it’s important to keep in mind that these methods won’t produce results overnight. Building or rebuilding good credit takes time.

  • Make timely credit card payments every month
  • Avoid unpaid credit balances
  • Keep a balanced mix of secured and unsecured loans
  • Use credit utilization ratio wisely
  • Fix credit report errors
  • Avoid applying for a loan or credit card immediately after a rejection
  • Set up reminders for loan and credit card payments
  • Avoid leaving partially settled amounts or minimum balances

Check Credit Score

FAQs
What are the most common factors that influence a person’s credit score?
There are several factors that can negatively impact your credit score, including late or missed payments, partially settled payments, multiple hard inquiries, and a high credit utilization ratio.
How can I get a credit score of 900?
You can aim to maintain a high credit score by paying your bills on time, keeping your credit utilization ratio low, and avoiding applying for too many credit accounts in a short period of time.
Is 800 a good credit score for purchasing a home?
An 800 credit score is considered excellent and is generally considered to be a good credit score for purchasing a home.
What are the advantages of having a higher credit score?
A higher credit score can lead to better interest rates on loans and credit cards, making borrowing cheaper. It may also make it easier to qualify for loans and credit cards, as lenders may view you as a lower-risk borrower.

Priyanka Juyal- a Writer with a curious mind & vision to create the best out of words. Other times, see her playing the guitar, sketching or narrating folk tales!

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