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4 Not-So-Obvious Reasons Your Credit Score Is Low


on 4/4/2018

Young guy holding eyeglasses with shocked expressionConsumers are increasingly aware of the importance of monitoring their credit.  Perhaps you’re one who has used various services to protect yourself from unauthorized use of your good credit.  

If you have looked into your credit and have been surprised that your credit score isn’t as high as you think it should be, you’re not alone.

Even if you have been perfect in paying your bills on time, you may find your credit score is just “good,” but not “excellent.”  You may find yourself staring at your credit report, scratching your head, and muttering to yourself, “What do I have to do to get a better credit score?”

The most commonly used credit scoring model in the U.S. is the FICO score developed by Fair Isaac Corporation.  There are different FICO models, explaining why your score is not always consistent from one credit report to the next.  In most cases, you can interpret your score like this. 

 

Score Grade Implications
720 and higher Excellent credit This indicates that you have used credit wisely.  In general, lenders will feel very comfortable that you will pay off your debt when you borrow
690-719 Good credit You will likely be able to get credit, but you may not get the best interest rate available.
630-689 Fair credit In this range, a lender will be looking to determine if your score will be moving up or if it is on the way down to a level much riskier to them.  You can expect to pay higher interest rates when your score is in this range.
Under 630 Poor or risky credit You will find it more difficult to get approved for credit.  It won’t be impossible, but when you do get credit, your interest rate will be much higher than it would be if you had a significantly better score.

 

Keep in mind, credit score is not the only factor in determining whether or not you will be approved for a loan.  It’s just one factor.  However, it will usually have an impact on how much you pay to borrow.


Here’s a surprise.  Paying your bills on time is not a guarantee of an excellent credit score.

It’s true that if you do not pay your bills on time, your credit score will be low.  However, you can pay all of your bills on time, every time, and you still may not get a score at the top of the charts.  Here are four potential reasons why.  

1.  You’re using too much of your available credit.
Even if you pay your credit card on time, your credit score will be dampened if you use too much of the credit available to you.

When you get a credit card, you will be approved to borrow up to a certain amount, your “credit limit.”  Using credit regularly and making on-time payments will help you establish credit.  But carrying a credit card balance that is a good portion of your limit will lower your score.

Keep your balance at or below one-third of your available credit line.  Pay down your balances on unsecured debt and you should see a quick and significant improvement in your score.  


2.  You made the common mistake of closing your old credit accounts. 
Many people who are careful with credit will close credit card accounts that they no longer use.  Go ahead and close the accounts if having a bunch of cards around just makes it more tempting to use them.  But, pay attention to which cards you close.  


The length of time you have been receiving credit determines part of your credit score.  If you close the first credit card issued to you, you may be shortening the length of your credit history - negatively impacting your score.


It’s a good rule to maintain that first credit card or credit line you received.  Keep the account open, and make sure you continue making payments on time.

   
3.  You’re accumulating too much debt too fast.  
You will enhance your score when you show you have managed multiple loans and credit lines over time.  Quantity and quality both count.  But, adding too much credit in a short period of time will be a drag on your credit score and alert loan officers that you may be heading toward payment difficulties.

    
Whenever you apply for credit, the lender will make an “inquiry” of your credit with the credit bureaus.  A large number of inquiries into your credit history in a short period will drive your score downward.  Having several new credit accounts opened in the last two years will do the same.


This doesn’t mean that you should stop using credit when you need it.  Just don’t start applying for every credit card offer you receive or at every store that will give you a discount for opening a new credit card.

 
4.  You have too much revolving credit.
“Revolving credit” is credit that you apply for once, and then use when you need it without having to reapply.  Credit cards and lines of credit are examples of revolving credit.


Loans that provide a fixed amount that you pay down with regular periodic payments are called “installment loans.”  The most common example is a car loan.


Having too much revolving credit can lower your score whereas having a good percent of your debt in installment loans can improve it.  If most of your debt is revolving credit, you may have a lower score than if you have more credit in installment loans.

 
What steps can you take to improve your credit score now?

Here are three actions you can take quickly.

  1. Pay down your credit cards to leave plenty of room between your credit limit and your revolving balance.
  2. If your credit is still reasonably good, apply for a credit limit increase and then make sure you keep your balance at or below 30% of the limit.
  3. Convert your revolving (credit card) balances to an installment loan.

 
Talk to a Genisys Credit Union Member Service Representative about ways they can help you improve your score.  Contact us to get your credit score moving in the right direction.


© Genisys Credit Union and www.genisyscu.org, 2018. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content

 

 

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