Having a low FICO score can be frustrating Your FICO score is one of the main factors lenders use to determine your creditworthiness for loans and credit cards A low score means you’ll get less favorable rates and terms – if you qualify at all.
So what causes a low FICO score? There are a number of factors that could be dragging your score down. Here are 7 of the most common reasons for a low FICO score and tips for improving it.
1. Late or Missed Payments
Payment history makes up 35% of your FICO score calculation Just one 30-day late payment can drop your score by over 100 points Consistently making late payments or missing payments altogether can sink your score even lower,
Making payments on time can help your credit score if you have late payments on your report. Getting rid of collection accounts can also help your score over time. Bringing past-due accounts up to date won’t completely fix the problem, but it looks better than leaving them past due.
2. High Credit Utilization
Your credit utilization ratio, which is the difference between how much you owe and how much credit you have available, is the second most important thing that affects your FICO score. Experts recommend keeping your utilization below 30%. Your score will go down if you max out your cards or use a lot of your available credit.
Paying down balances to get utilization as low as possible will help boost your score. You may also be able to increase your credit limits for an even lower utilization ratio. Just make sure you don’t go on a spending spree with your newfound credit.
3. Short Credit History
FICO scores factor in the length of your credit history. The longer you have accounts open and in good standing, the better. If you only have a few new accounts or lack a mix of account types, you won’t have a robust credit profile.
Allowing accounts to age and remain open will strengthen your credit history over time. Become an authorized user on someone else’s longstanding account to give your score an instant boost. Just make sure the account is in good standing.
4. Applying for New Credit
Every credit application triggers a hard inquiry on your report, which can nick your score by a few points. Applying for multiple new accounts in a short timeframe is seen as risky behavior and can really ding your score.
Limit credit applications to only when truly needed. Shop around for rates within a specific time frame, like 30 days, because sending in more than one auto or mortgage inquiry will be seen as just one. Allow time between applications for your score to recover.
5. Not Enough Credit Mix
Lenders like to see you can manage different types of credit responsibly. Having credit cards as well as installment loans like mortgages, auto loans and student loans demonstrates experience with diverse accounts.
If you only have one type of loan, get a credit card or an installment loan. Just make sure you know how to responsibly handle the new account by making payments on time and keeping the balances low. Don’t open accounts just to have a variety of credit types.
6. Inaccurate Information
If your credit reports contain errors like accounts that don’t belong to you or incorrect account statuses, your FICO score could be lower than it should be.
Dispute inaccurate or unverifiable information on your reports and provide evidence to the credit bureaus. Under the Fair Credit Reporting Act, they must investigate within 30 days. You can also ask creditors to report errors or updates to the bureaus.
7. Public Records
Bankruptcies, foreclosures, tax liens, civil judgments and other public records can devastate FICO scores for many years. A Chapter 7 bankruptcy typically remains for 10 years while a Chapter 13 bankruptcy may remain for 7.
Unfortunately, there is no quick fix for these types of events. Continuing to practice good credit habits and allowing time to pass so they fall off your reports are the only remedies. An exception could be negotiating pay-for-delete with collection agencies.
Tips for Raising Your FICO Score
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Review your credit reports from Equifax, Experian and TransUnion for free at AnnualCreditReport.com. Dispute any inaccurate information.
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Pay all bills on time each month. Set up automatic payments or alerts if needed.
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Pay down credit card and loan balances. Getting utilization below 30% can provide a quick boost.
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Don’t close old accounts as it can shorten your credit history. Leave them open but use sparingly.
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Limit hard inquiries by only applying for credit when needed. Comparison shop within a short timeframe.
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Ask for credit limit increases to lower utilization. But don’t increase spending.
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Add positive information by taking out an installment loan or becoming an authorized user.
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Sign up for free monitoring through your bank or a service like Credit Karma to stay on top of your scores.
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If all else fails, contact a credit counseling agency for help getting back on track.
A low FICO score doesn’t have to keep you down forever. With some time and commitment to better credit habits, you can turn things around. Monitor your credit, reduce debt burden, and demonstrate responsible behavior – your score will start to climb in no time.
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While you havent spotted any obvious reasons to explain why your FICO® score has been dropping over the last few months, there may be less-than-obvious changes to your credit profile which may have caused this drop. Keep in mind that your FICO score is essentially a predictive tool that evaluates your risk to a lender at a given time. So there may be reasons why your score has been dropping that may not be apparent, but still are considered from a risk perspective. The first step is to look at the negative factors returned with your current FICO score. Factors like “seeking credit” or “high credit usage” can be puzzling since they arent obvious, so lets take a closer look at both of these in a bit more detail.
A very common, yet not entirely obvious cause, for a score to drop is an increased utilization ratio. An increased what ratio? Yes, this is credit scoring lingo, but it basically measures how much of your credit are you using in relation to your total available credit. For example, if you had 2 credit cards each with a $1,000 credit limit ($2,000 available credit) and you charged $500 on each ($1,000 balance), youd have a 50% credit utilization ratio ($1,000 / $2,000 = 50%). In general, the lower this ratio, the better for your score. Therefore, if youve been using more of your available credit lately, that could account for a drop in your FICO score. For a more detailed description of the credit utilization ratio, read this article.
Applying for new credit accounts, such as department store cards or lines of credit can also account for a small FICO score drop. Each time you apply for new credit, an “inquiry” is added to your credit report. Each of these inquiries can have a small impact on your FICO score, and several inquiries in a short time frame will have a greater impact on your score than a single inquiry. So, if youve recently been seeking new credit, this also may have caused your FICO score to drop. Inquiries only account for up to 10% of your FICO score and there are some exceptions so read this article to get the whole story on inquiries and their relationship to your FICO score.
Now that you know what a utilization ratio is and that seeking new credit can hurt your score, the next obvious question is why does your FICO score care about these factors? The short answer is that research has shown that people who are using more of their available credit are more likely to miss future payments than those people using very little of their available credit. In addition, research also indicates that a person who is actively seeking credit is more likely to miss future payments than a person with the same credit profile who is NOT seeking credit.
These two reasons may explain why your FICO score has been dropping. Since youve noticed a steady decline over the last few months, it may be the case that youve been gradually using more and more of your available credit in addition to applying for new credit accounts. This does not necessarily mean that youve become a credit risk – but these could be signs that credit trouble may be looming. If possible, pay down the balances on your credit cards and hold off from opening any new credit accounts. By doing this, you should see your FICO score bounce back fairly quickly – as long as the rest of your credit profile remains unchanged.
However, if you cannot pay down your balances or if you find that you cannot make ends meet without finding additional credit, then you should take an honest look at your financial situation and determine if trouble might be on the horizon. You might benefit from speaking to a certified credit counselor who can help you figure out your available options – here is a list of US Department of Housing and Urban Development (HUD) certified credit agencies. From the myFICO team, we hope that this article has helped you identify potential credit concerns before they develop into serious problems.
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Why Is My FICO Score So Low? – CreditGuide360.com
FAQ
Why is my FICO credit score low?
Your payment history, the amounts you owe on your debts, and the length of your credit history all have an effect on your score. Your credit scores can also be affected by other things, like having wrong information on your credit report.
How can I raise my FICO score fast?
To quickly raise your FICO score, prioritize making on-time payments, reducing credit card debt, and keeping your credit utilization low.
Why is my FICO score lower than my others?
That’s because your credit scores depend on the information in your credit reports, which gets reported to the credit bureaus by lenders and creditors. But different credit-scoring companies and models may take different factors into account or weigh certain factors more heavily than others.
Why is my FICO score so low compared to Credit Karma?
Credit Bureau Data: FICO Scores can be derived from any of the three credit bureaus’ data, depending on what the lender requests. Credit Karma primarily pulls data from Equifax and TransUnion, which may lead to differences in reported scores.