What would you choose between $10,000 USD and excellent credit (800-850)?
If you’re anything like most people, you’ll certainly go for the money. Your choice is understandable. At a time when most people are living paycheck to paycheck, anyone will welcome a $10K boost.
However, if you were looking at the bigger picture, you would choose excellent credit. With such a credit, you can secure loans at preferred rates. It’s for this reason people strive to maintain good credit.
Unfortunately, credit scores can fall.
So, how low can your credit score go? What makes credit scores fall?
Continue reading for more insight.
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How Low Can Your Credit Score Go?
First, let’s tackle the issue of falling credit scores.
A credit score is a three-digit number ranging from 300 to 850. There are two scoring models, FICO and Vantage. Although these models had varying scoring ranges in the past, they now have the same range.
As such, the lowest score you can get is 300. The highest it can go is 850.
However, when you’re analyzing your credit score, it’s not advisable to just look at the number. This is because credit scores are grouped as follows:
- 300-579: Very poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional/Excellent.
This means having a credit score of 579 is just as bad as having a credit score of 300. In the eyes of lenders, both credit scores are very poor. A person with a credit score of 579 will suffer the same consequences as a person with a credit score of 300.
That said, you shouldn’t let your credit score to keep falling just because you’re already in the very poor group. When it comes to rebuilding credit, it’s far easier to take a credit score of 579 from very poor to fair, than it’s to do the same for a credit score of 300.
What Hurts Your Credit Score?
Now that you know how low your credit score can fall, let’s focus on what can cause it to tumble.
Poor Payment History
Did you know payment history makes up 35 percent of your credit score? It, therefore, follows that a bad or poor payment history will hit your credit score history the hardest.
What makes up your payment history?
If you don’t understand how credit scoring works, you’d probably assume that your utility bill payments count towards your credit history. What really matters is how you service your bank loans and pay up credit card balances.
If you’ve taken out a personal loan from a bank or any other lending institution, the account will show up on your credit report. If you start making late payments and skipping others completely, you’ll build a poor payment history. This tells the credit bureaus that you’re probably in financial pressure or you’re practicing financial irresponsibility.
The consequence? Your credit score will start falling.
The same applies when you have a credit card. The credit card account will show up on your credit report. If you fail to pay back your balances before the end of the billing cycle, your credit score will fall.
Letting Loans Go into Collections
It’s one thing to make a late loan repayment, and it’s quite another to default on your loan completely.
When a loan goes into default, your lender will sell it to a debt collection agency. The collector will try to get you to pay up what you owe, but the worst bit is your credit score will fall drastically.
What’s more, paying off the loan won’t automatically get the collection account off your credit report. Collection accounts stay on credit reports for seven years. During this time, any lender can see that you’ve defaulted on a loan before. Good luck getting them to lend you money.
A High Credit Utilization Rate
Your credit utilization rate or ratio is the amount of revolving credit you use up, divided by your credit limit – in a given billing cycle.
To illustrate, let’s say you have one credit card with a $2,000 limit. In the current billing cycle, you end up spending $1,500. In this case, your utilization rate is 75 percent.
And if you spent $500, your rate would be 25 percent.
From these two expenditures, what can you deduce?
The person who spends $1,500 probably has more financial needs than the one who spends $500. Or they are financially reckless.
Whatever you draw, the fact is a high utilization rate will make your credit score to fall. If you don’t want it to fall or you want it to go higher, you need to keep your utilization rate below 30 percent.
When you take out a secured loan, such as an auto loan or a mortgage, you risk losing the asset if you default on the loan.
While repossessions and foreclosures are usually a last resort measure for most lenders, you stand to lose a lot more than your car or house. Your credit score will experience a big fall and these events will stay on your credit report for at least seven years.
Filing for Bankruptcy
When you owe more than the total value of your assets, filing for bankruptcy is usually the next option.
While being declared bankrupt has its benefits (some of your debts might be discharged, for instance) its consequences will be far-reaching. Your credit score will probably hit the floor, and depending on the bankruptcy you filed for, the event will stay on your credit report for at least seven years.
Guard Your Credit Score
Your credit score is an important financial asset. A poor one will make your financial life harder will and an excellent score will set you on a path toward financial freedom.
If you were wondering, “how low can your credit score go?” you now know the answer. You also know the factors that can make your credit score hit the bottom. Try to avoid them.
All the best and keep reading our blog for more tips on personal finance.