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Why is My Credit Score so Low?


on 3/20/2019

Surprised man looking at credit reportYou have obsessed over paying your bills on time and have never been late on a payment.

However, when you apply for credit, you find that your credit score is good, but not excellent. 

What's that all about?

 

 

 

Before you throw your hands in the air and cry “NOT FAIR,” learn why your score is not what it could be.  Understanding your credit score is the first step toward improving your credit score.

 

What’s a good score?

The most commonly used credit scoring model in the U.S. is the FICO score developed by Fair Isaac Corporation.  A simple ranking of credit score looks like this:

  • 720 and higher indicates excellent credit.Lenders will feel very comfortable that you will pay off your debt when you borrow.
  • 690-719 is a good credit score.Creditors may look a little closer.You will likely be able to get credit, but you may not get the best interest rate available.
  • 630-689 is fair credit.You will be subject to increased scrutiny when you apply for a loan.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.
  • Scores under 630 indicate bad credit.You will find it harder to get a loan or 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.

 

Paying your bills on time is not a guarantee of an excellent credit score.

Most people understand that if you do not make payments on time, your credit score will suffer.  Some make all of their payments on time and still have a score in the upper 600 range, not the excellent 720 and above rating.  Why?

Make no mistake, the largest factor in determining your credit score is your payment history.  However, the difference between a good or fair score and an excellent score can be dependent on four other factors.

“I got a new credit card, used it, and make my payments on time.  So why did my credit score drop?”

  • One of the biggest drags on a credit score is your percentage of utilized debt.
  • Carrying a balance on credit cards (otherwise known as “revolving credit”) that is a significant percent of your credit limit will lower your score.This factor is nearly as important as your payment history in determining your credit rating.
  • Work to keep your balance at or below one-third of your available credit line.Paying down your balances on unsecured debt can have a quick positive effect on your score.
  • Increasing the amount of credit available to you can also improve your score as long as you don’t start using all that new found capacity to borrow and don’t add a bunch of new credit cards quickly.

 

Maintain that first credit card.

Many people keep their first credit card account strictly for sentimental reasons.  There are other reasons to keep a credit card open as well. 

The length of time you have been receiving credit determines part of your credit score.  So maintain that first credit line two ways.  First, keep a perfect payment history.  Second, keep the account open.  As time goes on, that account open date will provide extra points to your score.

 

Don’t pile on.

Getting and maintaining good credit will enhance your score.  But, do not add a bunch of new credit in a short period.

A large number of inquiries into your credit history by potential lenders will negatively affect your score and so will having several new credit accounts opened in the last two years.

Don’t let this factor stop you from applying for credit when you need it, just don’t go crazy and start applying for every credit card offer you receive.  Be careful that you don’t take on multiple store credit cards at the same time just to get a discount on your holiday shopping.

 

Too much is never a good thing.

Finally, having too much revolving credit can lower your score whereas having a good percent of your debt in installment loans can improve it. 

Installment loans are loans that provide a fixed amount at account opening that you pay down with regular periodic payments.  A car loan is an example.  Responsibly handling installment credit can give a boost to your credit rating.  You’ll still want to make sure you do not take on too many new installment loans at one time, though.  This can sometimes indicate that you’re strapped for cash.

 

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.  Need help budgeting or making payments on time?  Genisys also offers Greenpath Financial Wellness to get you back on track.

 

 

Sources: https://www.nerdwallet.com/blog/finance/credit-score-ranges-and-how-to-improve/

 

© Genisys Credit Union and www.genisyscu.org, 2019.  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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