A bad credit loan allows you to get loans for necessities like a car even with a low credit score but it can be challenging. A low credit score will affect whether lenders approve your loan request or not and even your ability to negotiate a fair interest rate. Thus, it makes sense to investigate what led to the dip in your credit score and to work towards improving it.
Can’t figure out why your credit score took a hit? You see, several factors could be responsible for the dip in your credit score. And, at times, the drop in your credit score is not because you did something wrong.
However, since a low credit score will affect whether lenders approve your loan request or not and even your ability to negotiate a fair interest rate, it makes sense to want to know what led to the dip in your credit score.Here are seven reasons your credit score may be low.
While you may be worried about your low score and want to work towards improving it, you can still get loans for necessities like a car to get to work even with a bad credit loan.
Here are seven reasons your credit score may be low.
Missed or late payment can affect your credit score big time. And, while this is not the end of the world, it will negatively impact your score.
Credit bureaus take into consideration your payment history when calculating your credit score. So, a late or missed payment entry on your report will cause your score to drop.
Hard Credit Score Inquiry
When you apply for new credit, a loan or a credit card, a hard inquiry is entered on your report. Though in itself, an inquiry is not wrong; however, multiple inquiries in quick succession will cause your score to drop.
Inquiries account for only 10% of your score, which means they can cause your score to drop a few points.
Overutilization of Credit
If you have been gradually running up charges on your credit card or have recently made a big purchase using your credit card that can increase your utilization ratio.
You see, credit utilization is 30% of your FICO score, and while you may think running up charges to card limit should not matter as long as you repay in full and on time, it does not work that way.
Credit utilization is the total of all your credit card balances compared to your combined credit limit.
The more you use up your credit, the higher your utilization ratio. And, it is a bad thing, as it signals to issuers that you may not be able to repay your debt.
Recently Applied For A Loan Or New Credit Card
When you apply for a new credit card or loan, lenders and issuers will often make an inquiry on your creditworthiness, before deciding to issue or approve the loan. This inquiry can affect your score.
Unfortunately, there’s nothing you can do than to wait for 12 months for the inquiry to drop from your report. However, in the meantime, you can refrain from making another application so your score can recover.
If you have recently closed an old credit account, you may notice your credit score dropping. That sounds counterintuitive.
Here’s the thing, when you close one of your old accounts, it is removed from your credit report which in turn, lowers your credit limit. And, as you know, a lower credit limit, means running up your utilization ratio.
Another reason closing an old account can impact your credit score is because it decreases your average account age. Credit history is usually factored in when calculating a credit score.
While paying off your loan is a good thing, at least, from a personal finance perspective, it sure does affect your credit score negatively.
You see, credit bureaus expect to see a healthy mix of credit on your report. A student loan, personal loan, credit cards are better for your score than say carrying only credit card debts.
A Black Mark Was Entered On Your Record
Circumstances may get to the point where you have to declare bankruptcy or default on a payment or get hit with a foreclosure.
Once these negative remarks are entered on your report, it drives down your credit score. It will take time to bring your score back up but do not give up.