A good credit score is a gate that stands between the average person and a multitude of financial advantages, such as securing a mortgage with a relatively low interest rate. If your credit score is too low, it’s going to prevent you from building financial independence at the rate you want.
So why is your credit score so low? And what can you do to fix it?
Why Your Credit Score Is So Low
These are some of the most common reasons behind low credit scores:
1. There’s a mistake on your credit report. Many consumers don’t know this, but it’s not uncommon for credit bureaus to make mistakes on credit reports. If you feel like you’re in good financial standing, and that you’ve consistently fulfilled all your financial responsibilities, do some investigating to see if there are any mistakes on your credit reports. If you find any information that was reported in error, you can dispute it; credit bureaus make it relatively easy to make this kind of claim. If credit bureaus ignore you or don’t work to resolve the issue, you can always contact a consumer protection lawyer and have them represent you to get the issue corrected.
2. You missed a payment. More commonly, credit scores dip because of missed payments. Maybe you forgot about a bill in the past, or maybe you didn’t have enough funds to cover the balance. Either way, you were late with a payment or you missed it entirely. In isolation, an event like this isn’t going to damage your credit score much, especially if you have a long credit history. But if you miss payments consistently, it has the potential to ruin your score. Turn on auto payments to prevent this issue, or use automatic reminders to ensure timely payments in the future.
3. You have overdue balances. Similarly, your credit score will be much lower if you have current overdue balances. Being late with a payment isn’t exactly good for your credit, but paying late is better than not paying at all. If you leave overdue balances on your accounts, or if you have old debts that continue to follow you, consider taking care of them as soon as possible.
4. Your debt ratio is high. Sometimes, low credit scores are a byproduct of a high debt ratio. In other words, the amount of debt you hold compared to your income and assets is particularly high, making you a risk in the eyes of financial institutions. The only two ways to resolve this are to reduce and eliminate your debts or secure income and assets (without new debt) to rebalance the ratio. It’s hard to pay off debt, especially at oppressive levels, but try to chip away at it whenever you can.
5. You’ve recently opened lots of new credit. Though it won’t make your credit score plummet, recently opening lots of new lines of credit can cause a dip in your score. This is seen as behavior indicative of financial risk, as financially stable individuals don’t routinely open many new lines of credit simultaneously. Fortunately, this detriment will go away with time, so avoid opening more lines of credit in the meantime.
6. Your credit limits have decreased. Credit issuers can choose to decrease your limits for many reasons. It’s usually due to some action or lack of action on your part, such as missing multiple payments or violating the terms of service. Either way, it’s going to impact your credit score. Consider working with your credit provider to restore your limits; they’ll likely give you specific instructions for getting back into good standing.
7. You recently paid off a loan. Believe it or not, good financial habits can sometimes negatively impact your credit score as well. For example, if you completely pay off a loan, it can cause your credit score to temporarily and minimally decrease. That’s because this loan is no longer serving as evidence of your ability to repay debt.
8. You closed a credit card. Along similar lines, closing a credit card, even if it’s for a good reason, can cause your credit score to decrease. Credit reporting agencies see this as a potential indicator of fiscal irresponsibility, but more importantly, it’s another line of credit that no longer exists to demonstrate your ability to pay back loans.
9. You’ve closed old accounts. The length of time you’ve held your accounts plays a role in calculating your credit score. In general, the older your oldest account is, the higher your credit score will be. Accordingly, if you decide to close accounts that are particularly old, it could compromise your total credit history and cause your score to decrease.
10. Your identity was stolen. Identity theft isn’t common, but it’s not exactly rare, either. If your credit score is consistently or severely decreasing, and you haven’t committed any of the infractions listed above, it could be because someone is opening new lines of credit in your name or otherwise misappropriating your identity. Check your credit reports often and flag suspicious activity to combat this.
Building a New Financial Future
Having a low credit score isn’t a death sentence. In fact, you can almost think of it as a new opportunity. Once you recognize that your credit score is low and that you want it to improve, you’ll have a critical chance to review your past actions, set goals, and build a pathway to a brighter financial future. You won’t be able to fix your credit score overnight, and you’re certainly not going to become an overnight millionaire, but by committing to small, iterative steps of personal finance improvement, you’ll eventually get to a better financial position.