If you noticed your credit score has gone down since the last time you reviewed it, there’s probably a good reason. To make sense of it, compare these common reasons for a drop in a credit score to how a new creditor might interpret those actions or behaviors.
Payment history is one of the most important components that makes up your credit score. Paying bills on time and in full each month will have a positive impact on your score. Note that late bill payments can stay on your report for up to seven years. In addition to payment history, the amount of money you owe and your available credit are also important factors to your credit score. For more information on what makes up a credit score, please see this article.
Your payment history is a record of how well you pay back loans. Creditors prefer clients who pay their bills on time and in full each month.
- If you are late on a payment, or more than one, new creditors may be concerned if you will be late on their payments.
- If you skip a payment, creditors might ask themselves if you will take their loan payments seriously.
- If you default on a loan by missing several payments, creditors may wonder if you will default on a new loan, too.
Payment history is built month by month as lenders, such as your credit card companies, report a payment rating to one or more of the three major credit bureaus. A payment rating identifies whether the account is current, past due, in collections or charged off within the activity period being reported. In turn, that month-by-month rating appears in your account payment history profile on your credit report. If you are curious to find out which bureau your lender reports to, it is a good idea to check with your card issuer.
Credit card, auto loan, home loan and retail account (such as store credit card) payments will appear in your payment history. Many people are surprised to find out that payments on utility bills (such as gas or electric) don’t always get reported to the credit agencies. In fact, this was one of the myths uncovered in TransUnion’s 2017 Credit Literacy Study. In addition, rent isn’t always reported to the credit bureaus. So ask your landlord to report on-time rent payments to TransUnion so they can be factored into your score. Find out more information about reporting rental payments in this article.
Before lending you money, creditors like to know that your budget can handle the new loan payments. If you have a lot of debt already, it could make it difficult to pay back a new loan.
- If you borrowed more money recently, this could affect your credit score. Creditors are less likely to lend money to you if you recently took out a new loan or two.
- Your credit card debt increased. A sudden increase in spending could make new creditors wonder when you will pay it all back.
- If you max out your credit cards, creditors may worry that you might not be able to pay back a new loan if your debt load has already increased significantly.
Most of the information on your credit report remains there for seven years. Since most loans take years to pay off, it would make sense that creditors would want to know your track record.
- If you recently applied for a lot of new credit, even if you didn’t accept it, this could set off red flags to creditors that you may be having money problems.
- If you stop using loans and credit, then creditors can no longer see how well you pay back loans or make payments on a credit card.