If you're in the market to buy a home in the near future, one of the first things you'll want to do is check to see what your credit score is like.
Your credit score plays a critical role in determining whether or not you'd be able to get approved for a mortgage. And odds are, you'll need to take out a mortgage in order to support such a large purchase.
A good score is what lenders want to see before they decide to approve a borrower for a home loan. If your score falls below that threshold - usually around the 650 to 680 mark - your odds of securing a home loan can exponentially fall.
But what if you've had good credit at some point and notice that your score has taken a tumble? What could have been the reason for such a fall?
As it turns out, there are several reasons why your score could have fallen, including the following.
1. You've Been Maxing Out Your Credit Card
Your credit card can offer a number of perks; namely, the ability to spend without cash in your pocket and the ability to collect points. But if you're not careful, you could find yourself spending up to the limit on your credit card.
This is not a good thing, as spending close to or at your credit limit can have a negative effect on your credit score. It's called "credit utilization," and it refers to how much of your credit you are spending. If you spend too much against your limit, your credit score will take a tumble.
Credit utilization gives lenders an idea of how responsible you are when you use credit. Ideally, it's best to spend no more than 30% of your credit limit in order to keep your credit score safe. Even less than this amount is better. Anything higher will suggest to creditors that you are irresponsible with credit.
2. You Missed a Payment (or More)
Missing payments is probably the worst thing you can do for your credit score. Even one missed payment can send your credit score plummeting. Even if you were just late on your payment and repaid it, your score can still suffer if the payment is made 60 days after it was due.
Not only will your credit score suffer by missing a payment, you'll also be slapped with late fees and penalties as a result. Missing payments is bad because it tells creditors that you're not responsible with your debts. It tells them how likely you are to repay your debts, and if you miss any payments, any future creditors may not want to work with you as a result.
3. You Closed out an Old Account
Do you have an old account and decided to close it because you haven't used it in years? That can actually be a bad thing.
Closing out old credit accounts can actually have a negative impact on your credit score. In fact, old credit is typically considered good credit. That's because the age of your credit history is a factor that's used to calculate your credit score. If you close your oldest credit account, you’re basically reducing the average age of your credit accounts.
That doesn't mean you can never close an old credit account. It's just best to be careful about how you do so. What's worse is trying to close an account that still has a balance outstanding on it. Always pay off your debts before trying to close your accounts.
4. You Recently Applied For Credit Cards or Loans
Whenever you apply for a credit card or loan from a new lender, a "hard" inquiry will be put on your credit report when the lender checks out your credit before making a decision about whether or not to approve you for a loan. What this does is temporarily cause your credit score to dip.
One hard inquiry shouldn't do much. But a few of them could. That's why it's not advised to apply for too many loans within a short period of time because it will make you seem as though you're really desperate for credit.
5. You Recently Paid Off a Loan
Believe it or not, but fully repaying a loan can actually cause your credit score to dip.
But isn't that the goal: to pay off your debts in full?
The reason why this may have an effect on your credit score is because it's always best to have a good mix of various types of credit and a certain number of open accounts. This will help to show lenders that you've got experience paying off your loans responsibly.
When you pay off a credit account, your credit mix will appear less diverse to creditors.
If your credit score is suffering, you may want to take the time to repair it before applying for a mortgage. You'll have a much better time securing a home loan to support a home purchase with a healthier credit score, which you can improve by making the necessary changes to your financial habits.