Nobody wants to be defined by a number. But when you apply for a loan, your credit score — a three-digit number between 300 and 850 — can decide whether you get approved.
You’re probably a great person — a hard worker and a friend to many — but if your credit score raises questions about your personal finances, lenders will deny your application or charge a higher interest rate.
In most cases, lenders will check your FICO score which is based on data from the three major credit bureaus.
So today let’s look at what lowers your credit score so you can get started improving it.
Items That Can Lower Your Credit Score
Old problems can lower your credit score, whether you realized it or not.
Even as you develop good credit habits, your score could be dragged down by other problems from your past, including:
- Bankruptcy: Some borrowers get so overwhelmed they have to hit the re-set button and restructure or dissolve their old debts. A bankruptcy can pull down your credit score for up to 10 years.
- Charge off: When a creditor gives up and stops trying to collect your installment loan or credit card balance, your credit report may be pulled down by a charge-off.
- Collection: If you don’t make a payment for 90 to 180 days, the creditor may sell your debt to a collection agency. The resulting collection account will drag down your credit score.
- Foreclosure: Failure to pay a mortgage loan gives the lender the right to claim and sell your home. The foreclosure process pulls down your credit score a lot.
- Repossession: Unpaid car loans can lead to a repossession which can also create bad credit.
- Settlement: When you agree to pay less than what you owe to settle a debt, the settlement agreement can have a negative impact on your credit score.
If you have this kind of negative information in your credit history — and if it’s reported accurately — you’ll need to wait while this information ages off your credit reports.
Developing good credit habits, while you wait will set you up for having excellent credit in the coming years.
As old problems age off, your score will springboard in the right direction.
Most negative information stays on your credit report for seven years. (Chapter 7 Bankruptcy will stay in your credit history for 10 years.)
But over time, as older negative information ages, it will have a less negative impact.
Your newer positive credit data will be a more important factor.
Inaccurate Negative Information Will Lower Your Credit Score
Federal law requires the three major credit bureaus to report only accurate information in your credit history.
Yet credit reporting mistakes happen, and they can destroy an excellent credit history.
Identity theft is a reality, too, and it can sink your solid credit score within weeks.
Your first line of defense against inaccuracies and identity theft is to monitor your own credit.
You can monitor your credit through a paid service, a free app, or the free credit score checks your credit card issuers may provide.
You can also get a free credit report from each of the three credit bureaus once a year through annualcreditreport.com.
This service is provided by the Federal Trade Commission.
Checking on your own credit regularly helps you stay ahead of mistakes and detect the warning signs of identity theft.
For example, if your credit monitoring shows a series of hard inquiries from credit card companies — and you know you haven’t applied for any new credit — there’s obviously either a mistake or fraud underway.
Get a Free Copy of Your Credit Report
How to Remove Inaccurate Negative Information
When you discover a credit reporting mistake or fraud within your credit history, you have the right to dispute this information.
Each of the credit bureaus — Experian, Equifax, and TransUnion — have online forms for disputing negative information.
The Fair Credit Reporting Act requires the bureaus to investigate your claim unless it’s obviously frivolous.
If they discover a mistake, they’re required to fix the error which could bump up your credit score.
When you detect identity theft you can freeze your credit with each bureau while you sort out the mess.
Learn More: How To Get Something Removed from Your Credit Report
Credit Repair Companies Can Help
When you have a complicated nest of credit inaccuracies pulling down your credit score, you may want to hire professional help.
Credit repair companies like Credit Saint and Lexington Law will untangle the mess for you.
They’ll charge a monthly subscription fee along with a set-up fee. You may spend upwards of $500 on credit repair within these three or four months.
But within those months a pro can get all your inaccuracies removed for you. If errors have pulled down your credit score, removing the errors should restore your good credit score.
Mistakes come in many different forms. An inaccurately reported charge-off or repossession could lower your score by 100 points or more if your credit is otherwise solid.
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How FICO Score Is Calculated
FICO stands for Fair Isaac Corporation, the company that developed the FICO scoring model which most lenders check when you apply for a credit card, mortgage loan, auto loan, or personal loan.
Data for your FICO score comes from your credit reports with Experian, Equifax, and TransUnion, the three major credit bureaus.
The credit bureaus get data from your current and past lenders, from collections agencies, and from public records in some cases.
For this post, we’ll call all these sources your creditors.
Elements of Your FICO Score
Your FICO score reflects credit data from five categories. The same holds true for your VantageScore, another model some lenders use.
Below I’ll list the categories and include some ways each category can lower your credit score:
Payment History: 35%
Payment history makes up 35% of your credit score. So late payments and missed payments have the potential to wreck your score.
Making payments more than 30 days late will start shaving chunks of points off your score within a month.
And this problem tends to compound month after month as 30-day late payments become 60- or 90-day late payments.
Set up auto payments if possible or use a personal finance app to help you remember to make on-time payments consistently.
Available Credit: 30%
How much credit you’re using makes up 30% of your score.
If you have maxed out credit cards, your score will be lower because you’re using so much of your available credit.
You may also see the term credit utilization ratio used to measure this part of your score.
Using more than 25% of your credit cards’ credit limits will start to pull down your score.
Length of Credit History: 15%
The length of your credit history makes up 15% of your credit score.
If you’ve never had a loan or a credit card before, you’ll have a young average age of accounts in your credit history.
If you’re just starting out in your personal finance life, your main strategy here will be to wait a few years and try to keep your new accounts open.
If you have already established a credit history, closing too many accounts can lower the average age of your credit and then lower your score.
So even if you get a debt consolidation loan and pay off your credit card debt, consider keeping some of the paid-off accounts open. (This will also help with your credit utilization rate.)
New Credit: 10%
This 10% of your score reflects how often you apply for new credit accounts.
Applying for several loans in a short period of time will be reflected in the credit inquiries section of your credit reports.
Each time you apply for a new account, your report will show a hard inquiry.
(A soft inquiry occurs when you check your own score or get a rate quote, and it won’t hurt your credit score.)
Mix of Credit: 10%
The FICO and other credit scoring models like to see variety in your types of credit.
Having a couple credit cards, an installment loan, a car loan, a student loan, a mortgage loan, and a home equity line of credit looks a lot better than having six or eight credit card accounts and no other types of credit.
Good Credit / Bad Credit Snapshots
To increase your credit score, develop good credit habits, and do them consistently, month after month and year after year.
A Good Credit Score Profile
Someone with a good credit score usually:
- makes consistent, on-time payments
- doesn’t use more than 25% of his or her available credit
- has an average age of credit accounts of about seven years
- doesn’t apply for new credit very often
- has several different types of credit accounts.
A Bad Credit Score Profile
Someone with a bad credit score is more likely to have:
- several missed payments or late payments older than 30 days
- high credit card balances and even maxed out accounts
- mostly new accounts or no open accounts
- more than three hard inquiries within the past year
- only one or two types of credit accounts.
A Credit Score Isn’t Everything, But It Matters
Consumers with average or bad credit will have fewer options when they need to borrow money.
The loan options they have available will normally require higher interest rates and charge higher loan origination fees — both of which lead to higher monthly payments.
Along with your credit score, your debt-to-income ratio and your ability to make a down payment could affect your borrowing power.
We’d probably all prefer banks and credit card issuers look beyond the data on our loan applications. But credit scores are and will continue to tell lenders what they need to know about our personal finance habits.
Developing better credit habits, staying patient while old negative information ages off, and getting inaccurately reported negative information removed from your credit reports will help your credit score climb.