Credit history is one of the main characteristics of the modern person. It can determine the future and limit opportunities. You know the paradox when the best conditions are available only for the people without financial problems, and the complete opposite situation when you need urgent money, get emergency cash immediately bad credit to boot.
It seems unfair, but banks care about profits, not about charity, so we have to accept the situation and follow the rules. It’s a complex topic with multiple parameters; it’s impossible to present them all in one article. Let’s start with the impact of late payments on credit scores.
What Does High Impact on Credit Score Mean
To answer this question, we need to define the concept of credit score. It’s a calculated value that shows a person’s reliability from the lenders’ point of view. It can fall into one of five categories: a very poor value of 300 points to an exceptional maximum result of 850 points. According to statistical data, in 2020, the average value of Americans was 711, which equates to a good mark.
It’s not a stable value; the score changes over time due to your decisions. Some actions can cost you several points; others will dramatically damage this value. What loans have the biggest impact on credit score? The amount of money you owe takes 30% of the overall calculation of the total score, so the more you own, the lower the result.
So, it means that the impact of a car loan on credit score is more prominent than the effect of small consumer loans. Of course, it is true only for the debt you have at the moment.
Which Actions Can Negatively Impact Your Credit Score?
We are going to show you an example of a personal loan’s impact on credit score. Let’s assume you have an average result of 711 points. When you submit an application, this value stays the same until the lender checks you. There are two types of checks. The soft one doesn’t affect the score, but it’s applied rarely.
In most cases, the financial organization runs a hard check. The impact of the hard pull credit score is minimal; your initial result will drop several points. This effect is temporary, and all negative consequences will vanish after a year.
It means that you shouldn’t worry about the credit check impact on credit score: even in the case of hard inquiry, credit score impact is minimal. After revision and approval of the application, the score falls again because the amount of the debt rises.
Now, this value for you is lower than 700. It’s not bad, these changes are temporary, and if you pay the debt in time, the final result will be higher than in the beginning.
What if you can’t pay the loan back properly? If the payment was made in30 days, you have nothing to worry about, the information will not be sent to the agency. Late payment implies more than 30 days after the due date.
What Factor Has the Biggest Impact on a Credit Score
The overall score is constructed from five factors with various degrees of influence, such as:
- the history of your previous debt (35%);
- the debt amount at the moment (30%);
- the duration of your history (15%)
- new loans applications (10%);
- credit mix (10%)
The most important factor is influencing all parameters in compliance with the agreed repayment schedule. Late payments’ impact on credit score is hard to overestimate. Actually, one late payment can damage the overall score by more than 100 points. In our example, your result would become lower than 600 points, and it’s a significant drop.
It may sound surprising, but the debt settlement credit score impact is not good. You think that you lowered the debt and gave a lot of money to the lender, so it’s a sign of your reliability as a borrower. But in lenders’ eyes, you changed the initial agreement with the settled payment schedule. It’s unfair, but this action’s effect will last for the next seven years.
The common question you can see on the Internet: “Do student loans impact credit score?” Yes, they do, and the positive or negative effect depends on the borrower. If you repay it in accordance with the schedule and don’t miss installments, student loan impact on your credit score will be positive. So, the rules are the same as any other type of borrowing.
Credit utilization impact on credit score is a commonly missed factor. The term means the difference between the limit the credit card provides, and the amount you actually use. If your card offers a limit of $1000, and you used $200, your utilization value is 20%. This parameter doesn’t have the greatest effect, but you must consider it if you care about the credit.
Which Actions Have No Impact on Your Credit Score?
Reading the article, you may form the opinion that every action affects the credit, but it’s not correct. Some activities have no consequences at all:
1. Account Overdraft
Even if you do it on a regular basis, the bank doesn’t report such actions to the agency. It means that this information won’t be considered in the score calculation. But don’t forget that if your balance is negative for a long time or if the debt is large, this data will be included in your credit report.
2. Credit Report Checking
As we mentioned before, soft checks are not included in the calculation and have no effect. In other words, accessing your credit report won’t harm the total score, and you can do it as often as you wish.
3. Changing Job or Losing an Income
The employment information is not part of the equation of score calculation; it can’t affect it in any way. This information can be used when a lender processes your application to determine your compliance with the minimum requirements and conditions you are qualified for. Still, it has nothing to do with the score.
4. Agree on High-Interest Rates
The amount of money you payback doesn’t alter your score; the relation is inverse: the score determines the number of interest rates.
Summarizing the material, we want to highlight the importance of timely payments. This is the most significant factor with the biggest influence on the score. Try to think the situation through and evaluate your economic capabilities before borrowing, and you won’t face the problem of missed or late payments.