What Will Affect My Credit Score?

Here at Certified Credit Experts, we often get questions about how to fix credit score, how credit scores are calculated, and what transactions affect a credit score. Though it may seem hard to fix credit score repair is a process that we help our clients undergo every day. Check out the guidelines below to know what affects your credit score and how you can improve your current score.

Fix Credit Score by Closing Credit Card Accounts?

It might seem logical that closing a credit card account would only help your credit score–after all, without the account you will no longer accrue debt with that particular lender, right? However, closing old or unused credit cards can actually hurt your credit score because it will lower the amount of overall credit available to you. This affects your credit utilization ratio, which is used to calculate your credit score. This ratio is determined by dividing your total used credit (or your outstanding credit debts) by the total credit available to you (or the sum of your credit limits on all of your accounts). If you eliminate some of your available credit by closing an account, your credit utilization ratio goes down, which hurts your credit score.

What are the different categories of late payments, and how do they affect my credit score?

Credit scoring software uses these criteria in evaluating the impact of late payments on your credit score:
  • How recent your late payments were made.
  • How severe the late payments are.
  • How frequently the late payments happen.

If you made a late payment recently, this might hurt your credit score more than a few late payments that occurred in the past.

Creditors report late payments in incremental categories: 30-days late, 60-days late, 90-days late, 120-days late, 150-days late, or charge off, in which the delinquent payment is written off as a loss because of extreme lateness. The longer a payment is late, the more it negatively affects your credit score. You can recover from a late payment before it becomes a charge-off by catching up with your payments. Once the creditor charges it off or sends your information to a collection agency, it will greatly hurt your credit score for some time.

Keeping current on your bills is key to maintaining a good credit score, as your history of payments is a key part of how your credit score is calculated. Of course, life sometimes deals out unpleasant surprises, so medical emergencies or job loss might affect your ability to pay bills. If situations like these arise, reach out to your creditor and see if they can work out something with you so that it does not convert to a charge-off.

How does a foreclosure or repossession affect my credit score?

Foreclosures and repossessions will stay on your credit report for 7 years, but as time goes on, their impact on your credit score diminishes. As long as you keep all of your other debts in check and your accounts in good standing, your credit score should begin to recover in 2-3 years. A foreclosure or a repossession is a single negative incident that can be isolated and overshadowed by positive action in your other credit obligations.

Will public records and judgments affect my credit score?

Public records are created when a judge rules against you in small claims court. When this happens, the legal documents considered accessible to the public, and are maintained by Federal and local governments. While public records like divorce do not affect your credit score, records like bankruptcies and tax liens are taken into account when your score is calculated. The impact of negative public records on your credit score will diminish over time; still, they will stay on your credit report for up to 10 years.

Judgments will appear on your credit report for 7 years from the date they were filed and almost always have a negative impact on your credit score. If it seems that a delinquent payment or credit obligation will escalate to a courthouse setting, make contact with your lender and see if you can make an arrangement before legal action is taken. They may want to avoid the stress and time of pursuing a court case.

What is a collection account and how does it impact my credit score?

When a creditor submits your debt to a collection agency, you have a collection account. If you have had one or more accounts reported to a collection agency, your collection account will appear on your credit report along with the name of the collection agency and the amount of money you owe. Even if you pay off your collection account, it will not be deleted from your credit report, but just marked as “Paid.” That’s why you should strive to make payments before your creditor resorts to bringing in a collection agency.

What is a Charge Off and how will it affect my credit score?

There are three categories of debts that are not paid on time:

  • Delinquent – If you don’t make a payment in time, your account is considered delinquent.
  • Default – Once your payment is 30 days past due, it is considered default. This shows that you (the borrower) have not paid as required by the loan’s terms. Default payments will be reported to the credit bureaus at this time.
  • Charge off – When the creditor determines that your debt is noncollectable, usually around 6 months from the date of your first default payment, it will be deemed a charge off.

Charge offs are the most serious of missed payments and will negatively affect your credit score. Though your lender will be able to write off your charge off on their tax return, they will hold you financially responsible for your debt.

What is a credit inquiry and what affect will it have on my credit score?

10% of your credit score is calculated using the number of inquiries made on your credit report. Whenever a business requests your report, it counts as a credit inquiry.
Since credit inquiries do affect your credit score, The Fair Credit Reporting Act or FCRA requires that businesses have a good reason for accessing your credit report. These reasons can include:
  • To grant you credit
  • To collect your debt
  • To underwrite insurance
  • To grant you employment
  • To grant you a license (government agencies
  • In legitimate business transactions

If a company obtains your credit report under false pretenses or uses it improperly, they are in violation of federal law.

Types of Credit Inquiries:

Only inquiries made because of a credit application, called “hard inquiries,” impact your score.

If you review your credit report (as we suggest you do every 6-12 months), you might notice credit inquiries from businesses to which you did not make a credit application. Sometimes, outside business check your credit report because they want to offer you goods or services, like creditors who whose “pre-approved” offers you receive in the mail. Potential employers, businesses with whom you already have credit, and even you can also make credit inquiries; these are all considered “soft inquiries” that do not affect your credit score.

How Credit Inquiries Affect Your Score:

To business, too many inquiries on your credit report could reflect your risk as a borrower, indicating that you’re taking on too much debt at once or that you are in financial trouble and seeking credit to dig your way out. Thus, several inquiries in a short amount of time drops your credit score.

If your credit report has a lot of information (for example, if you have many accounts with a longer history), an additional inquiry may not impact your credit score. Conversely, if you have a limited credit history and few accounts, adding another inquiry might lower your credit score.

Although credit report inquiries appear on your report for 2 years, only hard inquiries made in the past year impact your credit score calculation.

Credit Inquiries and Rate Shopping:

As you seek out mortgage and automobile loans, it’s understandable that you want to get the best rate available to you. If you’re worried that having your credit checked by different mortgage and auto loan lenders could damage your credit score, you’ll be happy to learn that most credit score calculations categorize mortgage and auto inquiries as a single entity if they are made within a 30-45 day period of one another.

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