Why Is My Credit Score Low?
Disappointment aside, it is better to ask why your credit score is low than to not know your credit score at all. Surprisingly, 54% of Generation Z don’t even know their score. Yes, a low score can affect your ability to access loans and credit cards — potentially delaying your financial freedom, home or car ownership, or other plans. But with all of this information at your fingertips, you can start working to achieve your best possible score. Here’s why your credit score is low and how to take action.
How Low Can Your Credit Score Go?
Your credit scores are a lot like your SAT scores — there are a minimum and maximum score range (scores range from 300 to 850), and national data to establish benchmarks for “average,” “low” or “high” scores. From this information we know that:
- 38% of Americans have a credit score over 740.
- Roughly 30% have a score between 640 and 739.
- 28% have a score below 640.
But just like SAT scores, a good score is relative. Your score needs to be high enough to match your ambitions. For example, if you want to apply for a mortgage, bear in mind that the average credit score of a homebuyer in the US is 728. Typically, a score above 700 puts you in strong borrowing territory, while a score below 600 might present obstacles. To stretch the SAT analogy, remember that your credit score is just one part of the entire picture, so don’t give up on any plans solely because of a low credit score. Instead, try to achieve your best possible score in tandem with other factors.
Why Does Your Credit Score Matter?
You may need to address a low credit score in circumstances such as applications for credit cards, car loans and mortgages. Lenders may either refuse an application or require a higher interest rate where your credit score is perceived as low. In fact, more than half of Americans have been refused a loan or credit card because of a low credit score. Bear in mind that your landlord, utility company, insurer and even employer can request a copy of your credit report and may challenge why your credit score is low.
Common Reasons for a Low Credit Score
Before we talk about the common factors that impact a credit score, remember that time is a key element. If you’re new to the country or just turned 18, you’ll be starting from scratch even if you’ve never borrowed before. However, once your credit history is live, these are the most common reasons for a low credit score:
- Missing payments on existing cards and loans. Your payment history accounts for roughly one-third of your credit score.
- Maxing out your available credit or carrying too much debt in relation to your income (Credit utilization counts for a further 30% of your credit score.)
- Bankruptcy, foreclosure, defaults, court judgments and even unpaid parking tickets.
- Making only minimum payments each month on your credit cards.
- Holding too many credit cards and loans.
- Holding no cards or loans. Paradoxically, lenders need to see your history of borrowing and repayments to establish your creditworthiness.
- Too many hard searches for your credit score, as these suggest that you’re applying for more credit. Wherever possible, do soft searches only.
Negative information such as credit card charge-offs and bankruptcies stay on your report for up to 7 years and are then expunged.
Common Myths About Low Credit Scores
Although we’re referring to your credit score, there is actually more than one source for obtaining your score, so expect the results to be within the same range. Remember that your score is yours alone, and it is not affected by:
- Your partner’s or family members’ score (unless you co-sign a loan).
- Your address — you won’t be blacklisted because of previous tenants in your property.
Even if your credit score is low, you may still be able to borrow money or get a credit card. It’s a myth that a low credit score will prevent you from borrowing, although you will probably be restricted to less competitive interest rates and terms.
How To Achieve Your Best Score
If you have a credit score that is considered low for your financial plans, there are several steps you can take to improve it. Building up your credit history is a steady process that is best treated as a habit, but you can achieve a better score if you:
- Stick to borrowing no more than 10% of your available credit where possible. Repayments will be manageable and lenders will see you as a responsible borrower. If you’re not using your entire authorized credit, reduce the limits on your borrowing.
- Diversify your credit sources. The more evidence you can provide of responsible borrowing and regular repayments across loans, cards, utility bills, store cards and even your phone plan, the more you can add to your credit history.
- Hold onto your cards and credit lines. Even if you’ve paid off your outstanding balance, leave accounts open. Your credit score will improve the longer you have a history of holding accounts.
Finally, make sure you check for errors on your report. With data drawn from so many sources, mistakes can happen. Even worse, you might find out that you have been the victim of identity theft, in which case fast action is essential.
Check out SmartCredit’s suite of tools and resources for managing your credit score and taking appropriate action if you have a low credit score.