Your credit score is an invaluable financial metric for many institutions. Banks, insurers, recruiters, and landlords refer to it when they evaluate your creditworthiness. The indicator is never static, as it changes along with the history it summarizes. Discover critical factors that cause scores to plunge in our guide.
FICO and VantageScore, the two most popular scoring models in the United States, both have a scale from 300 to 850. They consider similar aspects of your financial experience, such as the size of total debt and timeliness of payments. The number of points determines what loans you can take out, what apartments you can rent, what insurance policies you qualify for, and what jobs you can get. So, what are the biggest don’ts for a borrower?
Top 6 Derogatory Marks
Every US citizen has three versions of their history — reports compiled by Experian, Equifax, and TransUnion. As the bureaus do not share information with one another, each of the documents is unique. It is based on data provided by lenders. Every financial institution may communicate with one, two, or three bureaus, but the reports are not always accurate — check Lexington Law alternatives for more information.
Any entry reflecting failure to meet obligations is regarded as a derogatory mark. These details inevitably bring the score down. By working with different components of your history, you can give your score a boost. For example, consider the key steps to have a 700+ credit score or higher. According to Experian, the most damaging items are:
- late or missed payments (these affect 35% of FICO and 40% of VantageScore, which makes this factor the most influential derogatory mark);
- accounts in collections (see above);
- high account balances (11% of VantageScore, up to 30% of FICO);
- high utilization (the proportion between the sum of balances and sum of limits on all credit cards determines 20% of VantageScore and up to 30% of FICO);
- short history (the length of history determines 15% of FICO and 21% of VantageScore);
- too many accounts with balances (large size of overall debt).
How to Prevent Damage: Top 5 Tips
The best thing you can do is meet all of your obligations every time. Failure results in late payments, collections, and bankruptcies. Do not wait until these damaging items accumulate. Here are five measures you can take to build and maintain a positive status.
Pay on Time
Being diligent with payments is the first thing you must do. Even one missed due date will drag the score down. If you fail to pay for several months in a row, the lender will pass your debt to a collection agency, which will only aggravate your problems.
If you are just a few days late, there is a chance that your slip-up will not be reported. Make the payment and contact the bank as soon as possible. Financial institutions communicate with the bureaus based on a reporting cycle. Usually, banks report payments as missed when they are 30 days overdue. Until then, you may persuade the lender not to share this information provided that you pay. This may work once or twice.
The less available credit you use, the better it is for the score. Utilization is calculated for all revolving credit accounts – i.e., credit cards. Experts recommend sticking to 10% or under (another common opinion is that 30% is the threshold). This means a holder of four cards with a total limit of $6,000 may use no more than $600 or $2,000 in total. This shows why maximizing cards is such a bad idea.
Get More Credit
This is another way to bring down the ratio. You may ask your bank for a limit extension or get a new card from another issuer. Finally, becoming an authorized user on someone else’s account will also boost your score, as their limit will work to your advantage. If you have a friend or relative with an excellent history, ask them for a favor.
Use Experian Boost
This free service lets you gain around 12 points by adding more information to the report. Did you know that your HBO subscription on phone bills could be part of the score calculation? The trick will help you boost the score a notch.
Every time an institution checks your history, this leaves a special mark known as a hard inquiry. A high frequency of inquiries over a short period of time affects the score, as it makes you look like a desperate borrower. This only applies to mixed types of credit (cards, mortgage, auto loans, etc.). Rate shopping is acceptable.
How to Correct
Around a third of Americans have flawed scores as their reports contain errors. At the same time, the Fair Credit Reporting Act entitles you to accurate financial history. You can initiate formal disputes to have the wrong information removed.
This multistage process may be daunting for the average consumer, particularly when they have to contact more than one bureau. Professionals come to the rescue, and their services are extremely popular. Delegated repair includes these phases:
- collection of your reports from three sources: Experian, Equifax, and TransUnion;
- a line-by-line analysis of their contents to identify disputable data;
- collection of evidence;
- preparation of customized dispute letters.
Every dispute letter triggers an internal investigation that lasts for 30 or 45 days depending on the situation. Then, the bureau provides a formal reply and mails you a copy of your corrected report if the changes have been accepted. Professional assistance with repair costs between $79 and $129 per month on average. If you do not want to pay, you may try fixing the score yourself — check the Consumer Financial Protection Agency website for a dispute letter template.
To Sum up
Your score is a multi-factor calculation that includes different aspects of your borrowing experience, from the length of history to prior payments. It is crucial to meet all obligations according to your loan agreements. If the score falls unfairly, you can restore it using professional services from credit repair firms.