Which of the following will likely lower your credit score?(1 point) Responses You are three months away from paying off your 5-year loan. You are three months away from paying off your 5-year loan. You recently declared bankruptcy. You recently declared bankruptcy. All your low balances on your credit cards. All your low balances on your credit cards. All of your accounts date back five years or more.
You recently declared bankruptcy.
The factors that are likely to lower your credit score are:
1. Recently declaring bankruptcy: This can significantly impact your credit score as it indicates financial instability and an inability to repay debts.
2. All your low balances on your credit cards: Surprisingly, keeping low balances on your credit cards can also lower your credit score. This is because credit scoring models consider a utilization ratio, which is the ratio of your credit card balances to your credit limits. Maintaining a higher utilization ratio (below 30%) is generally viewed as more favorable.
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To determine which of the following scenarios will likely lower your credit score, we need to understand how credit scores are calculated and what factors can affect them.
Credit scores are determined by credit reporting agencies, such as Equifax, Experian, and TransUnion, based on various factors. While the specific algorithms used by these agencies may differ, the general factors that can influence your credit score are:
1. Payment history: This refers to whether you have made your payments on time. Late payments, defaults, or bankruptcies can negatively impact your credit score.
2. Credit utilization: This is the proportion of your available credit that you are using. Keeping low balances on your credit cards is generally considered good for your credit score, as it indicates responsible credit card usage.
3. Length of credit history: The longer your credit history is, the more data credit reporting agencies have to evaluate your creditworthiness. Having accounts that date back five years or more can positively impact your credit score.
Now let's analyze the given scenarios:
- You are three months away from paying off your 5-year loan: Since you are close to paying off a loan, it generally shows responsible financial behavior and can potentially have a positive impact on your credit score.
- You recently declared bankruptcy: This scenario indicates a significant negative impact on your credit score. Bankruptcy will remain on your credit report for several years and can make it challenging to obtain credit in the future.
- All your low balances on your credit cards: This scenario is generally positive for your credit score. Maintaining low credit card balances shows responsible credit utilization and can have a positive impact on your credit score.
- All of your accounts date back five years or more: This scenario is generally positive for your credit score. Having accounts with a long credit history demonstrates stability and responsible credit management, which can positively impact your credit score.
In summary, the scenarios that are likely to lower your credit score are declaring bankruptcy, while the scenarios that are likely to have a positive impact on your credit score are maintaining low balances on your credit cards and having accounts with a long credit history.