If you are looking for ways to improve your credit, the best way to start is to learn which actions you may currently be taking that are hurting your credit score.
The following 4 actions are very common, although most people aren’t aware that they can hurt their credit score. Once you are aware of how these actions can impact your credit, you can avoid making them and begin to improve your credit score.
1. Asking for a Lower Credit Limit
Did you know that 30% of your credit score is determined by how much you owe versus your available credit? This is known as your credit utilization ratio, which is expressed as a percentage. A high utilization ratio makes you seem like a riskier borrower to financial institutions when they are considering you for a loan or a new credit card.
Here is an example of how to calculate your utilization ratio:
Credit Card 1: Credit limit $5000, Balance $1000
Credit Card 2: Credit limit $2500, Balance $2000
Utilization ratio = Balance/Credit Limit = $3000/$7500 = 40%
Therefore, if you have a balance on your credit card when you ask for a lower credit limit, this will negatively impact your credit score because your utilization ratio will increase as your debt will remain the same against a lower credit limit.
2. Paying Off Installment Accounts Too Soon
An installment loan – mortgage, auto loan, student loan - is a loan that requires you to make monthly payments of the same amount, over a set period of time.
Since 35% of your credit score is made up of your payment history, if you pay off an installment loan early you will not build up a payment history. A great way to improve you credit score is to make sure you make your monthly payments on-time until the loan is fully paid off - so avoid paying off your loan early in a lump sum.
3. Inactive Credit Cards
If you have a credit card that you haven’t used in a long time, it can negatively impact your credit score. If a credit card provider identifies that your card has been inactive for a good length of time, they may opt to close the account.
When an inactive account is closed, it also impacts your credit score negatively. This is because it will decrease your amount of available credit, which in turn will increase your utilization ratio. As previously mentioned, the higher your utilization ratio the worse it is for your credit score as it shows that you are using up a large percentage of your available credit.
In order to avoid this situation from occurring, you should consider using your credit card for minor purchases on a monthly basis – as a result, you will keep the account active over time.
4. Too Many Credit Inquiries
A credit inquiry is whenever someone requests to see your credit report. There are two types of credit inquiries, soft and hard, and they both affect your credit score differently.
Soft inquiry - This type of inquiry doesn’t have an impact on your credit score, and even though it appears on your credit report it is only visible to you. It includes your own requests to see your credit report, as well as inquiries from companies who you currently have an account with.
Hard inquiry - This type of inquiry occurs when a potential lender requests to see your credit report - when you apply for a loan, a new credit card, or a new cell phone plan.
Although soft inquiries don’t affect your credit score, if you have too many hard inquiries in a short period of time, this indicates to potential lenders that you are a higher risk to lend to.
While there are many actions that can lead to a lower credit score, these 4 are some of the most common and are easy actions to quickly rectify. If bad credit is a reality for you, and you are looking to get a new car Canada Drives can help. We have built an extremely easy and fast online application system, where we match you with a local car dealership that has vehicles that you are pre-approved to buy – regardless of your credit score.
Apply today and within 24 hours you can be approved for your loan and have vehicles waiting for you to view.