Recognizing the problem is the first step in fixing your credit.
Your credit score is a reflection of your borrowing habits. Sometimes, it is a product of typographical errors, inaccurate reports and identity theft.
Let’s discuss first the common reasons why a person gets into debt:
- You obtained costly secured loans. Did you purchase a house you cannot comfortably afford or equipment loans, and other types of loans secured by assets or capital? A mortgage and other secured transactions are debt agreements where the lender takes a security interest in your assets or the capital itself.
- While the security interest involved in a secured debt is relatively low because the capital is accessible to the lender the event of default, the borrower is pressured into paying on time to avoid the risk of losing the house. If you missed payment, you are most likely to pay late fees and other penalty charges, and the interest may accumulate as well. That’s why many home owners get high-interest personal loans, quick loans and even second mortgages just to save their homes.
- Those who take out a second mortgage may have to pay an interest which is slightly higher than the first mortgage. It is because in the event of default, they have to stand in line behind the first creditor in recovering the borrowed funds. Further, the value of the house may sink below the value of the loan amount.
- You have a car loan. Unlike mortgages, a car loan is expensive because when the bank holds title to the vehicle, there is a substantial risk that the car may be stolen or damaged in a crash and thus the lender may not be able to recover the value of the car loan.
- You bought furniture or other tangible durable goods through a financed purchase transaction. Did you buy your living-room furniture, computer, kitchen appliances and other durable goods through financing and made them as security – assets? If so, you are most likely to pay for a higher interest rate because there is substantial risk that these assets may not be recoverable by the lender. Further, the secured-durable goods may lose their substantial value. Thus, the lender may charge you an intermediate interest rate in the loan amount.
- You have high-interest unsecured loans such as credit cards, personal loans and quick loans. They usually bear high interest rate costs because they do not have specified security assets behind the borrowed amount.
- You obtained Payday loans. They are known for having extremely high interest costs. Every so often, the interest goes at 100% or higher, as lenders presume you are nearing default and you don’t have access to any other loan. Payday loans are designed to collect the principal value of the loan as part of the interest rate charges, because of the presumption that you are nearing bankruptcy and they will never be able to recover the full amount of the loan.
Now, let’s get into the technicalities of a poor credit score…
If your score dropped all of a sudden and you cannot pinpoint the exact reason why your credit score dropped, check if it is due to the following changes in your credit report:
You paid more than 60 days late. Once your late payment on your credit cards, personal loans, line of credit and other types of debts show up on your credit report– your credit score will eventually drop. It’s because your payment history makes up a huge percentage of your credit score. If you’re using Equifax or Dun & Bradstreet, payment history makes up 35% of your credit score.
You maxed out your available credit. Since utilization accounts for 30% of your score, if you maxed out your card or used up more than 30% of your available credit, your credit score is likely to drop.
You closed your oldest account. Remember that your Credit History accounts for 15% (Dun & Bradstreet) or 5-7% (Equifax) of your credit score. So, if you closed old accounts, the reporting agency will refer to the oldest one available in computing your oldest available credit account. And if you had a good repayment history on the account you closed, that information will be wiped out from your credit file as well.
You have New Credit accounts and many credit inquiries. Well, they make up 10-12% (Equifax) or 10% (Dun & Bradstreet) of your score. When was the last time your creditors made credit file inquiries? How many new credit accounts did you open compared with the total number of credit accounts you have? Making so many inquiries within a short period of time could indicate that you are anxious to get a new loan, and it will not be good for your credit score.
You are not able to balance multiple credit accounts or tradelines. Your credit mix or the type of credit used makes up 15% of your credit score. It must have a good mix of revolving debt and installment loans.
You applied for Payday Loans or Rent-to-Own consumer leases. These are one of the biggest culprits in bringing down your credit score. Equifax believes that people who apply for this type of solutions are normally desperate and unable to manage their cash flows.
Do you want to increase your credit score but you don’t know where to start? Clean Credit knows how to fix credit in the most convenient way possible, so call us today for more details.