The Causes of Bad Credit: This Is What Lowers Your Credit Score

23% of Americans have a subprime or lower credit score (less than 620). This can make it hard to get good loan options and lower interest rates.

So what lowers your credit score? These are the factors that go into how your score is calculated, and what you can do to fix it.

Bad Data

When you want to repair your credit score, the first thing you should do that will have the most impact is to pull your full credit report. You can request a free credit report from the major credit bureaus Experion, TransUnion, and Equifax once a year, and you should take advantage of it.

The credit report will show every credit account you have open. It shows the accounts that are closed, payments, and other vital details that affect your score such as any outstanding debt you may have missed.

Once you get your report, read through it line by line, and ensure everything is accurate. Make sure you have the accounts open that the report states and that the payment history is accurate.

If you find any discrepancy or inaccuracy, dispute it. This generally takes 30 days, but pulling bad info off your credit report can boost your score right away!

Stuff happens where data gets missed. Or even worse, someone may have opened a credit card in your name. Now at least you can catch it and fix the problem.

You Pay Late

If you miss a credit card payment, you’ll likely have to pay a hefty late payment fee on it too. But so long as you pay the bill before 30 days pass, it shouldn’t go on your credit report.

But if it does, that’s a big issue. Payment history makes up 35% of your credit score.

So what happens if you do pay late and your score is tanking because of it? There are a few things you can do.

You can write a letter to your creditor to forgive the late payment if you faced a hardship that caused the missed payment. This works better if you have actual documentation of the hardship, and you have a good history with this company.

But even if you don’t, you may be able to strike a deal. You can try a “pay for delete letter” where if you pay off the balance, they’ll take the bad marks off your score.

And finally, you should start paying on time to set up a good history of timely payments (and avoid those ungodly late fees.)

You Max Out Your Cards

The second biggest factor on your credit report is the balance, accounting for 30% of your credit score.

Lenders like to see that you can responsibly use credit, which means you don’t use all your credit. Ideally, your total debt to credit ratio should be less than 30%, and in a perfect world, you want that ratio to be 30% per credit line.

That’s because lenders look at your total debt ratio, but also the ratio on each line of credit. Let’s say you have three cards with a $3,000 credit limit on each. If two are empty and one is maxed out, creditors will look at that more negatively than if you just had $1,000 on each card.

There are two ways to fix this.

One is to get more credit — but that’s probably not a good idea if you have a history of maxing out cards. It might be tricky too if your score already doesn’t look too hot.

The other way is to pay down your cards. If your goal is to be debt-free, try paying off each card one by one, starting with either the lowest balance or highest interest rate. If your goal is to improve your credit score, get each card below 30% before moving on to the next one.

You Don’t Have Credit Diversity

Your credit mix makes up another 10% of your score. Lenders like to see that you can handle several different types of credit well. This can be credit cards, car loans, personal loans, or mortgages, amongst other things.

So if you only have a series of maxed-out credit cards, your diversity isn’t helping out. But you can try to get one of the best loan options for poor credit to add some diversity to your credit mix.

Your Credit History Is Still Young

Some lines of credit, say a mortgage, take decades to pay back. So creditors want to make sure that you have a healthy long history of safely managing credit. That’s why the length of your credit history accounts for 15% of your total score.

So avoid closing any lines of credit you currently have open to make your credit history look longer. It’s also a smart idea to avoid taking out any new cards or loans since that will make your credit history average shorter.

Now You Know What Lowers Your Credit Score and How to Fix It

Understanding what lowers your credit score is the first step in building up better credit. Most importantly, pay your bills on time, keep your balances less than 30%, and don’t close older accounts.

Fixing your credit score can take a while, so you have to be determined throughout the path. But it’s a worthwhile task that can make your financial future that much better.

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