What Causes Your Credit To Fall Into The Red In The First Place
Your credit says a lot about you. In fact, it tells lenders everything they would need to know about you to decide whether or not to give you a loan. Here’s a summary of what they see when looking at your score. Also, how it affects their decision.
- An excellent rating: It’s equivalent to a score of 800 and above. If you fall into this category, then you can expect to get good rates as well as terms anytime you apply for a loan
- A very good rating: It’s equal to 720-799. A score in this range means you can also expect to get good interest rates and possibly some perks since you’re a low-risk borrower
- A good rating: It’s equivalent to 680-719. You can still expect to get good interest rates and approvals when your score is in this range.
- An OK rating: It’s equal to 620-679. You’re considered a moderate-risk borrower. It means while you’re able to get a loan, there’s a chance it’ll come with higher interest rates.
- A poor rating: It’s equivalent to 580-519. At this range, your financing options exclude getting a bank loan. Moreover, your classification as a high-risk borrower means any loan you do get would come with high-interest rates.
You should be aware that credit scores do change from time to time. Hence, the occasional dips can happen. But if you’re not careful you could ultimately plunge your credit score in the red, which is something that you don’t want to happen to you. Hence, it’s best to know what can cause your score to drop so that you can take the necessary steps to avoid it.
- You’re behind on your payments
Remember, your payment history accounts for 35% of your credit score. If you’re late by 30 days or more on your payments, then it can have an enormous impact on your credit. Moreover, it’s one of the quickest ways you can hurt it.
- You defaulted on your payments
What’s worse than being behind on your payments, well not paying it at all. If you do this, then it’s guaranteed your credit score will drop. Moreover, it would send the wrong signals to lenders who will consider you a high-risk borrower. However, it can get worse if your unpaid account is eventually charged off.
What is a charge-off?
You don’t want to get a charge-off mark on your credit report. A charge off means a loss for a creditor because you defaulted on your payment. Your unpaid debt is marked as such after 120 to 180 days. It can get worse for you if the lender hands you off to a collection agency. If so, then you might end up at the mercy of a debt collector.
- You’ve applied for new credit
Every time you apply for a mortgage, a new credit card, or any loan, a lender will request for your credit report. They do this to check if you’re credit-worthy. Inquiries into your credit report make up 10% of your credit score. Here’s what you should remember before applying for new credit.
- Consider your credit history. If it’s short then getting a lot of new accounts at once can cause your score to dip.
- If your credit score is already low, then a hard inquiry can bring it even lower.
- You filed for bankruptcy
Bankruptcy is one of the derogatory marks you can have on your credit report. In fact, it can have the highest impact on it according to Wallet Hub. It’s a sign to creditors that you have serious financial problems. Here are the three types of bankruptcies you might encounter depending on your particular financial situation.
- Chapter 7 involves liquidation proceedings that sell off a debtor’s assets to raise money to pay creditors. It applies to individuals, couples, companies, and partnerships.
- An individual debtor can be discharged from bankruptcy within six months after filing
- A bankruptcy trustee takes charge of the proceeding
- A debtor’s wages after filing a Chapter 7 aren’t part of the settlement proceeds paid to creditors
- Chapter 11 involves a reorganization process and covers partnerships and corporations operating a business. In this case, a creditor and the court would have control over how the business is managed to secure the debtor’s ability to repay its loan
- Chapter 13 is a repayment program designed to help you pay back creditors. You can use it to avoid a foreclosure and repossession.
Credit scores can dip on occasion. So, it’s something you should expect. However, if you’re not careful, then your credit score could quickly take a nosedive and cause severe damage to your credit report. Hence, it’s in your best of interest to know the possible reasons it can happen. In doing so, you’ll be able to avoid serious problems by managing your finances better. If you are facing a drop in your credit score and would like to raise it you can read more about credit repair companies here.