Your credit score is a numerical representation of your creditworthiness, and it plays a significant role in various financial aspects of your life, like getting a loan, renting an apartment or buying a home, and even employment opportunities. With that being said, several financial aspects can lower your credit score and keep you from the opportunities that having good credit provides.
Here are five factors that can lower your credit score:
1. Missed or Late Payments:
- The Biggest Culprit: Consistently making on-time payments for credit cards, loans, and other lines of credit is crucial.
- The Impact: Even a single late payment can significantly damage your credit score. Multiple late payments can further deteriorate your creditworthiness.
2. High Credit Utilization Ratio:
- Understanding the Ratio: This ratio measures the amount of credit you’re using compared to your total available credit.
- The Danger Zone: Aim to keep your credit utilization ratio below 30%. Exceeding this threshold can negatively impact your credit score.
3. Excessive Hard Inquiries:
- What Are Hard Inquiries? Each time a lender checks your credit report, it’s known as a hard inquiry.
- The Downside: Too many hard inquiries within a short period can negatively affect your credit score, as it may signal to lenders that you are actively seeking credit.
4. Closing Old Credit Accounts:
- The Puzzle: While it might seem tempting to close old credit accounts, doing so can negatively impact your credit score.
- The Reason: A longer credit history demonstrates a track record of responsible credit use. Closing old accounts can shorten your credit history and hurt your score.
5. Defaulting on Loans or Credit Cards:
- The Worst-Case Scenario: Defaulting on a loan or credit card (occurs when a borrower fails to make payments on a loan according to the agreed-upon terms of the loan agreement) is the most severe negative financial impact on your credit score.
- The Consequences: It can lead to a significant drop in your credit score, making it difficult to obtain credit in the future.
The Financial Impact of a Poor Credit Score:
A poor credit score can lead to several financial hardships:
- Higher Interest Rates: Lenders often charge higher interest rates to individuals with lower credit scores, increasing the cost of borrowing for loans, mortgages, and credit cards.
- Limited Credit Options: A low credit score can restrict your access to credit, making it difficult to obtain credit cards or loans, or limiting you to unfavorable terms.
- Difficulty Renting: Some landlords use credit checks as part of their tenant screening process. A poor credit score can hinder your ability to secure housing.
- Employment Opportunities: In certain industries, employers may conduct credit checks as part of the hiring process. A poor credit score could potentially negatively impact your job prospects.
Free Financial Counseling for IAM Members
As an IAM Union member, we can connect you with a certified financial counselor to analyze your financial situation and provide advice. Each session is personalized to your situation. This may include reviewing your budget, conducting a Debt Analysis, and analyzing your credit line.
For those in debt, you may be referred to a Debt Management Program (DMP) to work with your creditors. Our partnership is with The SafeGuard Group, a Nonprofit 501(c)(3) Agency.
Tap below to fill out a form and get connected with a financial counselor.
