Your credit score is a direct indicator of your credit worthiness. This means that if it’s too low, you present more risk to lenders. Your life will be affected negatively on many fronts; difficulty in getting an apartment or a job, high rates on insurance, mortgage, and car loans and so on.
With that in mind, it’s best that you find out the top reasons your credit score is so low. This will be the first step into fixing your financial woes. To help you in this, let’s find out the common causes of credit score drop and how to fix it.
- Having High Balances on Your Credit Cards
Good credit management calls for clearing all credit card debts in full. If however your balances are high at the end of every month, then your score could drop. This is because the amount you owe on your revolving lines of credits accounts for 30% of your score.
Ideally you should only utilize up to 30% of your credit card limits for favorable credit rating. Owing small amounts on several cards is also advisable as opposed to maxing out one card. Another way around this is by having lenders increase your credit limit; this will allow you to spend the same amount while maintaining a low balance.
- Applying For Several New Lines of Credit
Credit cards come packaged with enticing offers; these include reward points, zero interest rates for the first few months and cash bonuses on hitting certain limits. Simply put, without iron clad resolve you may find yourself applying for every credit card that hits the market.
The downside of having many and new cards is that each represents a hard inquiry on your score. If these inquiries are done frequently within a short period, the hit will be bigger, leading to a sudden drop in your score. To avoid this, go for as few lines of credit as possible.
- Closing an Old Account
Have you recently closed a credit line that you had held for long? If so, then you must have notice a drop in your credit score. Here is why; 15% of your credit score is determined by the length of your credit. This is typically determined by averaging the age of your open lines of credits.
To avoid such future loss of points, prefer old lines of credits over new ones; if you have a credit card that has no annual fee keep it for as long possible, this can come handy in future when you might need a high score for a major loan for example a mortgage.
- Your Credit Report Has an Error
A low credit score can be as a result of an error in your credit report. If this befalls you, then you could be among the 5% of consumers who have an error in their credit report as provided by one the three major reporting agencies. This errors could be due to identity theft, mix up of customer information even duplication of entries.
To identify these errors, compare reports from Equifax, TransUnion and Experian. Any inconsistencies can be disputed by writing to the specific agency or the company from whom the error originates.
- Being in Collections Without Your Knowledge
Unpaid loans especially ones that have been long overdue can end putting you in collections. This has a huge impact on your creditworthiness, with 35% of your credit score being on the line.
It might seem obvious that you should know about all of your unpaid debts, but that is not always the case. It’s possible to find your score dropping because of a hospital bill which you thought your insurer paid; only to later realize that the hospital billed you instead and collections was called on you after you were deemed to have defaulted.
The Take Away
Knowing why your credit score is so low is the first step towards its improvement. There are several reasons why this could arise; it could range from running huge balances on credit cards, having many new cards, closing aged accounts to being in collections. You could also be dropping points due to errors made on your credit reports. The above information not only outlines these reasons but also gives you a place to start towards having higher scores.