Just imagine this, you checked your credit report hoping to see some improvement with your credit score after paying off some bills, but you see a 30 point dropped with no apparent reason. This is an unusual and frustrating experience many Canadians face when their credit scores drop unexpectedly. Overall, credit scores shift up-and-down from time-to-time, but seeing a downward trend is something you should be concerned about.
There are many reasons to mention how your credit score can fluctuate. With these 5 factors mentioned below, are just some that Canadians should look into.
1) Missing Your Payment
Missing payment on your credit card, mortgage, loans, or any credit accounts is a common reason for lowering your credit score. Added fees can be problematic if missed or late payments continue to happen.
Missed payments have a more significant impact than late payments, especially when they are 30 days overdue. Setting up automatic payments or reminders are recommendable to ensure payments are made on time. For a simple guide in improving your credit score check out this article A Definite Guide to Build Up Your Credit Score.
2) Increased Credit Utilization
Credit Utilization refers to how much credit limit you are using. This can be calculated by your total credit account balance divided by your total credit limit and multiply by 100. Although there are various ways your credit score can be measured, credit utilization still plays a big part in your overall credit health.
Every active credit account comes with a credit limit, and each has an option to increase the limit depending if the account user is capable of paying it within a reasonable time. As you get closer to your credit limit, you are at risk of lowering your credit score.
For best practices, consider not exceeding or getting closer you credit limit. Pay off debts with high balances as soon as possible to avoid paying additional interest fees. Credit bureaus such as Equifax and Transunion recommend not to use more than 30% of available credit.
3) Co-signing a Loan
Co-signing involves another individual such as a relative or a friend with a good credit history to help in paying up a loan or any credit account. Co-signing initially does not hurt anyone’s credit score. However, a co-signer’s credit score can have a huge dent if late payments continue.
Check out this article: Does being a co-signer affect your credit score?
Before considering co-sign as an option, have a clear and well-thought plan to make sure big purchases can be paid on time. Take a look at our article 5 Steps to Get a Car Loan with a Bad Credit for an overview of co-signing and steps on making big purchases.
As a last resort, you may be forced to pay off debts in full amount to avoid further negative consequences in your credit history.
4) Applying Too Many Credit Accounts
Being approved for any credit products is easy these days since they are just a few clicks away on your computer. Having one credit account may not be enough to make everyday purchases, and it seems to have multiple accounts is justifiable.
Credit vendors and bureaus may worry if too many accounts are active due to the possibility of debt problems and relying too much on credit.
However, account holders who are responsible with their credit accounts can increase their credit score, but too many unpaid accounts can definitely lower it.
5) History and Length of Active Credit Accounts
Similar to having many credit accounts, the history and length of your credit account can also affect your credit score.
Having too many accounts in a short period is not good for your credit. However, credit accounts with timely and full payments display positive results on your credit score.
For best practice, it is best not to open and/or close multiple accounts in a short period, especially if there are still remaining balances. It is better to cancel a newer account rather than having one for a long time.