Five Reasons That Could Affect Your Overall Credit Score

Any time we want to apply for a personal loan, the first thing that lenders check is your credit score which is considered the main eligibility factor. We know how important a credit score is and it is pretty normal to notice a slight drop in your score when checking it. But if you see a decline of more than 10 to 15 points, you should immediately check why.

In this article, you will understand what is a credit score? and why it might be affected.

What is a Credit Score?

A credit score is generated based on your credit history. It is a 3-digit number ranging from 300 to 900, where 900 is the highest and 300 is the lowest. It indicates your overall creditworthiness and the ability to repay your debts without defaulting. It acts as a snapshot of your overall credit history.

If you have a credit score above 750, you can quickly get a personal loan approved at comparatively lower interest rates, and you will have to pay high-interest rates when you have a poor score. If you are wondering how to check your credit score, you can easily do so by using Buddy Score to know your creditworthiness instantly.

 Five Reasons That Could Affect Your Overall Credit Score

  • Errors in your Credit Report

Your credit report can have errors when not updated regularly. Because of this, your credit score will reduce.

As a solution, you must constantly review your credit report once a year without fail and check if your personal information and the accounts are correct. If you find any error, report it immediately to your respective credit bureau either by mail or phone. After removing the mistakes, your credit score will gradually improve.

  • Missed payments

Your payment history plays a significant role in your credit score, and it accounts for 35% of your FICO score. Therefore, if you have failed to make payments on time or missed a payment, your credit score will drastically reduce.

As a solution, you can set reminders to make payments on time. You can also start repaying all your past debts to increase your credit score.

  • Increased utilization of your credit

When you use your credit to make large purchases, your credit utilization ratio increases. As a result, your credit score will be affected negatively. The credit utilization ratio accounts for 30% of your FICO score.

As a solution, utilize the credit below 30% of your income. The lower your credit utilization ratio, the higher your credit score.

  • Decrease in your credit limit

If the lender reduces your credit limit, it might increase your credit utilization, ultimately reducing your credit score. 

As a solution, you can ask your lender to increase your credit limit to reduce your utilization of credit in such a situation. If this does not work, you might have to pay down your current balance.

  • Applying for multiple credit loans

Each time you apply for new credit, the lender performs a hard credit inquiry to know your creditworthiness and ability to repay the due on time. According to the FICO score, each hard credit inquiry will decrease your credit score up to 5 points for a year. Therefore, applying for multiple credit loans for an extended period can drop your credit score.

The only solution to this problem is to apply for a loan only when you need it.

Conclusion

When applying for a personal loan, the lender considers the credit score a primary deciding factor before lending you the money. With a good score above 750, you can get an instant personal loan at a competitively lower interest rate. It is also essential to check your credit report regularly to ensure that it does not have any errors, and doing so will boost your credit score significantly. 

Thus, the above reasons would have given you insight into why your credit score might drop. Making timely payments, clearing your past debts, and keeping your credit utilization under a limit can help you improve your credit score.