Why Is My Credit Score Low?

Many people complain about having a low credit score (what is the average credit score), but often don’t understand why their score is low to begin with. There are a number of reasons your credit score may be low, and a number of ways to avoid unnecessary credit score drops.

The first step to analyzing your low credit score or subsequent denial by a creditor is to acquire a free credit report. The best place to get a truly free credit report is at AnnualCreditReport.com, which is a government-sponsored program that allows consumers to order one report from all three credit bureaus once every 12 months. It is recommended that you order one from all three bureaus at once as they all report things a little bit differently. And only one of three may contain a derogatory item that may be the cause of your credit woes.

Once you get your credit report, you’ll need to look at a few key areas.

The first thing you should look at is the derogatory accounts. They may be listed at the top, or in a certain section within the report. These are all the accounts that have late payments, collections, charge-offs, or liens.

Collections and Charge-Offs Can Be the Worst

First review any collections or charge-offs. If you see a collection, there’s still time to fight it or clear it before it becomes a charge-off. If it shows as paid, it means you settled the collection, or paid it. It will still show up on your credit report regardless. If you see a charge-off, the original creditor already dismissed the collection as a loss, and released it to debt collectors, who likely contacted you to demand the money.

Either way, make sure any collections and charge-offs are legit and spoken for. If they’re reporting in error, contact the creditors and seek resolution. The best way to do this may be via a credit report dispute. These derogatory accounts can drop your credit score 50 points or more depending on the situation.

Next, review any late payments – installment lates are worse than revolving lates. Installments include mortgage, auto, student loans, charge cards, to name a few, and usually have a set amount that must be paid in a certain time period. Revolving accounts include credit card accounts, which have balances that usually fluctuate on a month-to-month basis.

Search for Mistakes

If anything shows as being late, make sure it’s accurate. Mistakes happen all the time, so it’s best to review your credit report at least once a year to stay on top any blemishes. If an account is currently late, make it current by paying any penalties, fees, and the regular minimum payment to get back on track.. If it’s an error, contact the specific creditor who is reporting the late and plead your case.

Once you’ve reviewed all the negative aspects of your credit score, look at any comments from the bureau on the report. These are usually one line comments at the end of the credit report that detail any issues affecting your credit score. You may see things such as:

- number of inquiries adversely affected the score
– too many credit inquiries last 12 months
– time since delinquency is too recent or unknown
– number of accounts with delinquency
– time since most recent account opening is too short
– number of bank or national revolving accounts with balances
– proportion of balances to credit limits is too high on bank revolving or other revolving accounts

These comments are usually pretty clear indicators that will help you pinpoint your credit problems.

A couple of the above have to do with inquiries, some specifically in the last 12 months. If you keep applying for credit cards, loans, mortgages, etc, your credit score will drop. While it’s been said that multiple inquires related to the same transaction don’t affect your score, applying for multiple credit cards and other loans at the same time or in high intervals will lower your credit score.

Recent Delinquencies Are Bad News for Credit Scores

Another has to do with recent delinquencies and delinquencies in general. Any recent lates will lower your credit score, though the effect will weaken with time. And the less credit depth and history you’ve got, the more impact one late will have on your overall credit score. Also, if you have a large number of delinquencies, your credit score will be low.

Related to that, one of the messages above involves time since most recent account opening. Any new credit accounts can lower your credit score in the short-term, although your credit score will rise over time with regular, on-time payments. If your credit accounts are all new, less than say two years old, your credit score will be somewhat depleted as well.

High Balances Will Lower Your Credit Score

The final two messages above relate to high balances, and the proportion of balances to credit limits (credit utilization). Basically it refers to any accounts that are near their limits, and the proportion of available credit versus the aggregate of your credit lines. If you’ve got maxed out credit cards and 90% of your total available credit exhausted, your credit score will be low, even if you pay everything on time.

Review the above, and make sure you pick apart your credit report and verify the reporting from all three major credit bureaus. Once you’ve got a handle on what’s bringing your credit score down, you can start rebuilding your credit, and raising your score. Keep in mind that credit building and repair takes time, which is one of the measures for establishing a good credit score, so be patient!

Tip: You may think your credit score is worse than it actually is. Take a look at my credit score range to see where you stand. And check out how to raise your credit score.

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