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What Hurts a Credit Score?

By Sally Maison
Published: Monday, September 7th, 2009

The crisis in the credit industry and this prolonged recession has affected home prices, mortgage rates, stock market activities, and even retail sales. However, negative effects do not float only on the large scale level. It has also penetrated into the lives of consumers, hurting their credit scores more than they can normally handle. Here are some primary factors that hurt a finance score:

What Hurts a Credit Score?Closing cards after a rate hike. It is unfortunate that most card companies are raising interest rates now when the economy is still on a helter-skelter. Yet the government and consumers can do little with this increase in rates. Credit deregulation allows banks and other credit companies to increase rates without limits, except from those imposed by competitions. Unfortunately, a consumer cannot just close his credit card to avoid increasing interest rates. This will only hurt his finance score, especially if he owns a card that maintains a low balance and has an outstanding payment history. 

Reduction of credit score. This is inescapable: a study by Fair Isaac Company (FICO) reveals that even credit limits of responsible debtors have been cut off. This can substantially increase debt to credit ratio of a consumer, thus, resulting in financial scores dropping to 20 points or more.

Engaging with debt relief firms. Settling debt through a debt relief firm is considered negative by creditors and will affect a credit score negatively since it will be registered as “partial payment agreement.” That remark by creditors along with “deferred payment” and “not paying as agreed” will cause a credit score to drop. This can also hurt a consumer’s financial reputation.

Being rejected for loans. This can hurt credit scores, but only to a minimal level. New credit only accounts for a tenth of the total finance score. The rejection of loan applications accounts for an even smaller percentage. However, rejected applications can make a person look bad to creditors. People who are often rejected by creditors are considered greater risks.

Despite the many factors which hurt a credit score, consumers should remain positive since there are many ways to make their financial scores look good. The official website of the Federal Reserve enumerates five effective ways to boost credit scores. One of which is to understand how
credit scoring works. Knowing how different finance models work can guide a consumer on how to manage his finances well. The official website of the Federal Trade Commission also has a section on “Building a Better Credit Report.” There are as many ways to build good finance reputation so finance experts tell consumers to cheer up and start working on their scores.

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