According to one report by Forbes in 2020, more than one out of five credit card users do not understand how credit scoring and ratings work. Consequently, they are not mindful of their spending behaviors that ultimately reflect on their credit accounts and lower their scores. Unfortunately, the reality hits such people when they need loans, mortgages, and new credit cards. Still, they are denied because of the bad rating. Similarly, building a good credit score isn’t a walk in the park.
Fixing a lousy score is more complicated than you may think. It takes time than it for your credit to drop. Here’s why fixing a lousy score will drain you rather than establishing your best foot with a good credit rating.
Understanding credit rating and scores
First things first, you need to understand what credit scores mean. This three-digit number is calculated from your credit report and reflects your credit profile. This rating is a critical aspect of your financial status because it influences many things, including whether you can qualify for a mortgage, new credit cards, auto loan, and your limits for the three provisions. In addition, credit ratings reflect your spending and debt repayment practices and influence how much lenders can trust you with their money.
How credit scores are valued
This section of the article helps you understand how credit scores are valued, i.e., how many points reflect. Of course, the valuation differs from one company or credit lender to the other, but according to FICO Scores, the following are the applicable rating valuations:
● 300- 579 for the poor
● 580-669 for fair
● 670- 739 for good
● 749-799 for very good
● 800-850 for exceptional or excellent
The classification above shows that any score above 670 points makes one eligible for most benefits and credit awards. Generally, though, 700 points are the price point, and anything below it disqualifies one from most credit card awards.
What it takes for your credit to be rated bad
The following are factors directly related to determining credit score calculation and the reason your credit score may drop.
1. Not paying bills on time.
Your payment history is the most critical factor in determining your credit ratings. Inter interfering with it automatically messes with your credit profile and scores. For instance, the credit bureaus check whether you pay in time, i.e., before the billing cycle ends.
If the answer is yes, they go ahead to find out whether you pay the minimum amount or the maximum, or if you just play along and pay somewhere between the minimum and maximum values. The worst-case scenario is when you default payments and by how many days. Failing by 30, 60, 90, and 90+ days affects your card, but the longer the period, the heavier the penalty.
2. Spending more than you are allocated.
The credit utilization ratio is another determinant of your credit score. It is the percentage of what you owe concerning what you are allocated. The higher the ratio, the worse the scores on the credit card. Generally, 30% and below is considered safe, but making it as low as possible is the best approach.
3. Haphazard opening of new credit accounts.
In calculating your credit rating, the credit bureaus consider how many credit accounts you have and how old they are. When you open a new account, a hard inquiry is made to your credit report, meaning everyone can see you were looking for credit, and when. This penalty temporarily drops your rating and impacts the overall scores. It is worse when you have a young credit account and apply for others. Therefore, while you may be after opening credit accounts to boost your score, be cautious not to give your card a lousy rating by opening too many.
4. Haphazard requests for credit limits.
When you qualify for credit limit increment, this is an advantage on your side because as long as the balance remains the same. Your utilization ratio automatically decreases since you now have a more considerable margin.
Generally, most organizations allow clients to apply for the increment every six months. However, keep requesting a limit increment before the six-month periods and do so for a young account and your rating might deteriorate. Before you know it, they will read “Bad.”
5. Failing to monitor your credit profile.
Most credit users only review their credit profile when falling on late payments, which is dangerous. The main reason for this is that the card might be having some errors and penalties slowing its rating. Still, you don’t notice the mistakes because you don’t check the profile. In some cases, some severe errors have seriously cost people credit scores, not to mention heartache if identity theft is discovered. Use sites like Credit Sesame, which allows you to keep track and alerts you if there is any trouble.
6. Letting accounts go dormant.
When people have multiple credit cards and realize that one particular card earns them many benefits, they tend to leave the old ones inactive. Before they know it, the accounts are dormant. As time advances, the bill for the static card drops scores become inactive and are closed by the debtor. Every closure of an account reflects on your overall rating. Before you know it, you will be below the excellent limit.
Why does it take longer to fix a lousy rating than establish a good credit rating?
We have seen from the section above that late payments, higher spending than what you are allocated, the haphazard opening of new accounts. Requesting a credit limit increment and letting accounts become inactive may drag your rating too bad. As it is, reversing these problems may take a while.
For instance, being late on payments for 90+ days repeatedly or having many errors whose correction deadlines have passed may not be easily reversible, hence the more time needed to reflect you have bounced back and gotten your finances under control.
Yet, it does not take much effort to establish a good credit trend, especially if you are a new cardholder. Pay on time, lower your utilization ratio, cautiously request credit increment, open new credit accounts, and keep good credit history and you’ll be on your path to maintaining a positive score.
The bottom line
Fixing a bad credit score and establishing a good credit score takes time. However, repairing a messed rating is more demanding than setting a good direction because reversing the causes of the bad scores is not as easy as establishing a good movement. But, all in all, there is always a way out to tackle the two cases.
Rose Rosie is a writer for the personal finance website, Joy Wallet, which provides readers with useful information, resources, and tools to help maximize their financial fitness.