Saturday, January 21, 2017

Is Your Credit Score Six Feet Under? It Might Be This ...

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Having a great credit score makes life a lot easier, especially when it comes to getting access to credit. But what happens if your credit score is six feet under? Well, that can make life a lot more difficult, especially if you want to buy a house or a car.

The problem with credit scores is that it isn’t immediately obvious what affects them. Of course, you want to avoid foreclosure and make sure that you pay off your credit cards on time. But it turns out that credit scores can also be affected by subtle means, many of which you wouldn’t normally consider.

Here are some of the reasons why your credit score might be dead and buried.

You Keep Closing Old Credit Cards

You might think to yourself, “so what, if I want to close a credit card?” But it turns out that closing cards you don’t need can affect your overall credit score.

The main reason for this is that it affects the “average age of your credit accounts.” Having an old credit card means that you have had access to credit for longer and, therefore, according to the rating agencies, are more trustworthy with credit. Canceling your old accounts reduces the average age of your accounts, suggesting to new lenders that you might not be as creditworthy as you first appear.

Many Card Inquiries At Once

Another problem that a lot of people have is making many inquiries all at once. It might seem like a good idea to sign up for a bunch of different card schemes to take advantage of loyalty points, but it can backfire.

The reason is that taking out multiple cards is usually a signal that you’ve gotten yourself into money trouble. If it looks like you're desperate for money, agencies will lower your credit score and force the interest rates that you pay up. These hikes could ultimately cancel out any benefit you derive from collecting points and cashback on different cards.

Your Utilization Ratio Is Up

Banks define the utilization ratio as the balance outstanding, divided by the credit limit. The closer the loan outstanding is to the credit limit, the higher the ratio will be.

Higher ratios are a problem because they indicate that you’re getting closer and closer to maxing out your card. Rather than seeing this as just your desire to have money now rather than later, credit rating agencies interpret it as a sign of distress.

A good rule of thumb is to make sure that your utilization ratio stays below 25 percent.

Just be warned that a utilization ratio of 0 percent isn’t a good idea either. A zero rating means that you’re not using credit at all and ratings agencies don’t have anything to judge you on.

Sometimes your utilization ratio can get too high, especially if you only pay off your credit card once per month. Experts suggest, therefore, that people who spend a lot of money on their cards organize to pay off some of their balance multiple times per month to keep their utilization ratio in check.

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