Managing finances can be a hectic task. Often in your busy life, you might miss out a tiny thing that might affect your credit profiles. There can be innumerable reasons for a drop in your credit score - some obvious reasons and some incredible ones. While there is no absolute solution to reset your credit score immediately, each of these reasons has a unique countermeasure that might help you in the long run.
A hard inquiry is a credit inquiry when a potential lender, following an application for a credit or loan made by you, reviews your credit score to check if you are creditworthy. A hard inquiry may occur for the following reasons:
Applying for a new credit card.
Upgrading a credit card.
Applying for a new loan.
Requesting for an increase in credit limit.
A new rental agreement where the landlord reviews your credit score
A credit score review conducted for a new telephone, internet, cable connection
The bottom line is that any credit check is treated as a hard inquiry as it indicates that a lender has reviewed your credit score because you have applied for credit. Too many hard inquiries reflect your desperation for credit and potential lenders might question your ability to handle more credit.
Most importantly, each hard inquiry leads to a drop in your credit score.
Countermeasure: It doesn't take long to recover from this score drop. Once an application is approved and you open a new account or increase your credit limit, the points added to your credit score can outweigh the initial drop in your score. Just ensure that your actions don't result in an unnecessary hard inquiry.
Bidding adieu to your oldest credit card can reduce your credit score. It will be considered as a sharp drop in your average age of credit history. It considerably impacts your credit score. That being said, closing any credit card account can diminish your total credit limit which causes a hike in your credit utilization rate and your credit score takes a hit.
Closing a loan amounts to the same. You should keep a mix of credit accounts and loans if you want to maintain a consistent record of credit score. You close a loan and you lose an account. Your credit score drops inevitably.
Countermeasure: As for your oldest account, try not to close it. And even if you do close an account, you will surely open a new one at some point in time. That will balance out your credit score. These are merely minor events if you consider the grand scheme of things.
Entirely using up the available credit on your credit card limit isn’t advisable. It indicates that you solely rely on your credit cards to manage your expenses. Lenders will consider you to be a risky borrower. It will not only reduce your chances of getting a potential credit in future, but it will also bring down your credit score.
Countermeasure: Try to pay off the balance immediately - in the very next month if possible. Keep your usage low for a while. Make sure that it looks like a one-time necessity. It won't leave lengthy effects on your credit health.
Late payments can and will damage your credit score more than in any of the three instances mentioned above. Defaulting on an account or missing a payment is a negative activity that largely impacts your credit score and leaves a dark mark on your credit report for a long time. Credit score calculations try to predict how likely you are to repay a debt. If you fail to repay once, it will surely raise a red flag. More so if it is the first negative activity in your credit report, as it serves as the first evidence that you could be a risk,
Countermeasure: There isn't an effective countermeasure for this. Your credit profile is likely to be tarnished for seven years. Just be alert and don't let it happen. Try to bring your account back to current status and make timely payments henceforth. The quicker you do this, the better are your chances of recovering your credit score.
In most cases, these mishaps won't dominate your credit record forever. The drop in your credit score will eventually fade away. You just need to be patient and give it some time to recover. A smarter idea would be to discipline yourself about money matters. A little cautiousness can help you prevent most of these negative activities. Try to inculcate responsible financial habits in yourself. Afterall, prevention is better than cure!