Has your score been dropping?
- Maintaining good credit is important to being able to borrow affordably.
- There are different reasons why your score could go down, even if you’re paying your bills on time.
- Carrying a high balance, applying for too many cards, and closing old accounts can affect your credit score.
So you have been paying your bills on time every month and have never been late. However, his credit score seems to be falling. What gives?
The higher your credit score, the easier it is to borrow money affordably when you need it. And so a series of smaller credit score hits could become problematic.
But there are different reasons why your credit score may be falling, even if you’ve done a great job of paying bills on time. Here are some you should know about.
1. You are carrying large credit card balances
Paying your credit card bills on time each month is an important step in maintaining good credit. But even if you’re doing that, if you owe too much on your credit cards, your score could take a beating.
In addition to your payment history, your credit utilization ratio is the most important factor in determining your credit score. So if you owe a lot on your credit cards relative to your total spending limit, your score could take a hit.
In general, to avoid a credit score hit, you should keep your utilization rate at 30% of your total spending limit on your various credit cards. So if you have a total spending limit of $10,000, you don’t want your balances to exceed $3,000.
2. You are applying for too many credit cards
Every time you apply for a new credit card, a thorough investigation will be done on your credit report to make sure you’re not too risky a borrower. A single hard inquiry will usually result in a five to 10 point hit to your credit score. And that’s no big deal. But multiple difficult inquiries could have a bigger impact, which means if you’re not spacing out your credit card applications, your score could plummet.
Your credit mix is another factor used to calculate your credit score and it speaks to the different accounts you have. If your credit mix consists of eight or nine different credit cards and no other types of loans, that could reflect negatively on you from a debt risk perspective.
3. You are closing old accounts
The length of your credit history also comes into play when determining your credit score. If you’ve been opening new credit accounts and closing old credit cards, your score could suffer because you’re left with a shorter credit history.
That’s why it’s often a good idea to keep older credit cards open, even if you’re not actually using them. The only exception is if you are charged an annual fee. It’s usually not worth paying for a card that you basically keep stashed away in a drawer somewhere.
Now that you know some of the sneaky reasons credit scores drop, you can take steps to keep yours in good shape. That might mean not carrying such high balances on your credit cards, not applying for too many credit cards too soon, and keeping older cards open even if you’re done with them.
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