Shockingly, the right actions such as applying for a new credit card or even paying off a loan can have a negative impact on your credit score. However, do not let this affect you since they are mostly temporary and easy to recover from. One way to see them is as if they are short term cons for long term benefits.
When your credit score drops, getting a fast approval loan in Singapore becomes a challenge. Therefore, you should know what actions typically cause a drop in credit score. Having such knowledge allows you to be one step ahead and in control of your credit score.
Hence, here are the 5 ways your credit score can drop.
You used your credit card for a large purchase
Your credit score is calculated using the credit utilisation rate. This rate is derived from dividing how much credit you use as compared to your available ratio. As much as credit cards are convenient in making these large purchases, it also increases your credit utilisation rate. A high credit utilisation rate gives loan companies the impression that you are under financial risk.
Therefore, it is recommended you keep the rate between 10% to 30% for the best credit score, and to secure an instant loan approval in Singapore. Another tip would be to pay your debt in full before the end of the billing cycle before making your next large purchase.
You closed your credit card account
This occurs primarily when the account you closed is an old account. Your credit score drops then because your accounts’ overall age will drop significantly, and it also lowers the amount of credit available. Your credit history length makes up for 15% of your score on FICO, which is why you are encouraged to build up your score from a young age.
After all, your credit account age significantly improves your credit score. However, if you are making payments from a credit card that’s no longer in use, you can get exemptions.
You paid off a loan
It’s known that clearing credit card debts will help to boost your credit score – but paying off loans in instalments like a student loan or mortgage does not have the same effect on your credit score as paying off a credit card debt.
In fact, it actually has the opposite effect as it will lower your credit score – this is due to you having one less credit account under you. Having a mix of credit shows that you have the capability to manage different debt types, which make up 10% of your FICO credit score. However, if you have the ability to pay off your existing loans; you should. Ultimately, your overall financial health is a lot more crucial.
Applying for a new credit card
When you apply for a new credit card, the issuers have to pull your credit score report. This will enable them to determine how much of a financial risk you pose before they can approve of your credit line.
Unfortunately, this temporarily takes a few points off your credit score which can last up to two years on your report. However, this is not an issue as FICO uses reports up to the past year while calculating your credit score. Moreover, getting a new credit card does help improve your credit score when you know how to use it correctly; through charging purchases as well as clearing them in full by the due date.
Missing a credit card payment
Your payment history makes up for 35% of your FICO credit score calculation. This makes it the most influential factor to consider when trying to increase your credit score. Missing a credit payment therefore has a direct and immediate impact on your credit score.
This is what most lenders frequently look at as it shows your financial risk. Your credit history and behavior after missing a payment are the factors that will determine how fast you can recover your credit score.
When it comes to your credit score, it isn’t just important to know how to boost your credit score; but to prevent it from decreasing as well. For starters, these are the few situations you should note and avoid in order to maintain an excellent credit score.