Your credit score is a three-digit figure calculated by Fair Isaac Corporation. FICO scores range from 300 to 850, with a score of 680 viewed as "average." A low FICO score can have a negative impact in many areas of your life, including your ability to borrow money, rent an apartment or even find a job. Your score can decrease for a variety of reasons.
Making Late Payments
According to FICO, your payment history is the single biggest factor in determining your credit score. Factors that contribute to the severity of a late payment's impact include the total number of past due items, the length of time an item is past due, and whether a delinquent item has been turned over to a collection agency. The type of account can also have an effect, as late credit card or installment loan payments are weighted differently than tardy mortgage payments.
High Credit Utilization Ratio
Your credit utilization ratio is the amount of used credit in relation to total available credit. For example, if the total credit limit of all your credit cards is $10,000 and your charges total $3,000, your utilization ratio is 30 percent. The lower the ratio, the more favorable impact on your credit score. Canceling an unused credit card can actually lower your credit score, as it raises your utilization ratio. Making a large purchase that causes your ratio to increase significantly can also lower your score, assuming you don't pay for it in full when you receive your statement.
Certain credit-related legal judgments and actions can cause a credit score to plummet. For example, if you fall behind on your mortgage payments and subsequently lose your home through foreclosure, your score can drop anywhere from 85 to 160 points, according to FICO. Some people may resort to filing for bankruptcy protection so they can keep assets such as homes and vehicles. However, the adverse effect is that their FICO score can drop as much as 130 to 240 points as a result.
Obtaining New Credit
The process of obtaining new credit can also lower your credit score. A large number of credit inquiries made by prospective lenders can reduce a score, as can a large number of credit accounts opened at the about the same time. Generally, the longer an account has been opened, the more positive the impact it has on your score, as long as you manage the account responsibly.
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