Credit Companies are Hurting Your Credit Score
Just when you think you've got the calculation of credit scores figured out... you discover that credit companies can actually hurt your credit score – and it's not what you are probably thinking. Of course, if you don't make your payments on time, a creditor can report you as 30, 60, 90 or 180 days late which will eventually decrease your FICO score, particularly if you make a habit of making payments late. But creditors can also decrease your credit score through no fault of your own. Your FICO score is calculated on a number of factors, each carrying different weights. The actual formula used is “top secret”, but we do know the following is used to determine individual credit scores:
- 35% of your score is based on how you pay your debts, with your recent activity having the most importance. Paying bills on time of course is ideal, while declaring bankruptcy is the worst. If you pay your bills late consistently or have bills sent to collections, this will cause big problems in the credit score department.
- 30% of your score is based on how much money you owe and how much money is available to you for borrowing. If you're using almost all of the money available to you, you're riskier than someone who has a lot of available credit.
- 15% of your score is based on how long you've had credit. College students have lower credit scores than someone who has been utilizing credit responsibly for 10 years because it's hard to predict how a new credit-user will pay their bills when there is no history to compare it to.
- 10% of your score is based on the type of credit you've had or currently have. A higher score is awarded to people who show they know how to manage a variety of credit types, including credit cards, mortgages, car loans, installment loans, etc.
- 10% of your score is based on how often you apply for credit. If you are applying for credit left and right, you are seen as riskier and receive a lower score than someone who doesn't apply for credit as often.
How Credit Companies Can Lower Your Credit Score – Even if You're Paying on Time
So how is that a credit company can actually decrease your FICO score, if you're making all of your payments on time?
Recently, a number of credit card issuers have been lowering available credit to their cardholders. Many of the cardholders who've been targeted for the reduced credit limits haven't been making their payments late, and some aren't even using their credit cards. Creditors are lowering the available credits of many cardholders simply to “reduce their risks”, as more people default on their credit cards or declare bankruptcy.
When your credit limits are decreased, your available credit decreases. Since your ratio of debt to available credit makes up 30% of your credit score, you can bet that the lowering of your available credit is going to impact your credit score in a negative way. Suddenly, you are using a higher percentage of your available credit, even though you didn't spend more money, and your credit score decreases as a result of this available credit change.
How Can You Improve Credit Score if This Happens to You?
Unfortunately, there isn't much you can do to stop a creditor from lowering your available credit limit. Often, they do it without warning and simply send you a notice in the mail to let you know the limit has been reduced.
The best way to help your credit score is to reduce your debt as much as possible, so you are using less of your available credit.
Comments
