Managing finances can be a hectic task. Often in your busy life, you might miss out on a tiny thing that could affect your credit profiles. There can be innumerable reasons for a drop in your credit score - some obvious and some incredible.
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 credit score is basically a measurement of your ability to pay back loans. It measures your prior instances of paying loans back in time, or your inability to do so. The better the score is, the more easily you can get loans, and the better your needs will be addressed.
The converse will happen in case of a low score and bad debts. Your credit score It is measured based on criteria like timely bill payment, money owed, credit history period, types of credit, and whether you have any credit currently.
The good news is that it is indeed possible to fix a damaged score. Whether or not you need a loan right now, doing this is quite important. For this, you need to pay bills on time and reduce debt. Cutting down on expenses and saving more is certainly more helpful at such times.
Normally, you may check your credit score at least once a year. Well, when you are fixing your damaged credit score, there are indeed ways in which you can have a free credit score report, which will keep you updated on your status regarding the same.
A hard inquiry is made 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 could 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.
The bottom line is that a credit check by a potential lender 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 the same.
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/unauthorized hard inquiry.
Bidding adieu to your oldest credit card can reduce your credit score. It would result in a sharp drop in your average age of credit history, considerably impacting your credit score. Closing any credit card account can diminish your total credit limit as well, which causes a hike in your credit utilization rate, and your credit score takes a hit yet again.
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. When you close a loan and lose an account, your credit score drops inevitably.
Countermeasure: As for your oldest account, try not to close it. Do so only if the yearly fee on the card is unreasonably high.
Entirely using up the available credit card limit isn’t advisable. It indicates that you solely rely on your credit cards to manage your expenses. Lenders will hence consider you to be a risky borrower. It will not only reduce your chances of getting credit in future, but 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, so that it won't leave lasting effects on your credit health. If you really need the funds, consider applying for a credit limit increase.
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 score report, as it serves as the first evidence that you could be an unreliable borrower.
Countermeasure: Set up reminders so that you don't let it happen. Even better - set up autopayment via a standing instruction to your savings account. 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 - just keep checking it regularly. 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 caution can help you prevent most of these negative activities. Try to inculcate responsible financial habits in yourself. After all, prevention is better than cure!