Credit scores can be very confusing.

You think you know the factors that impact your score but it’s still possible that you are doing the right things and still end up with a bad score.

This article is going to give you the low down on the most common reasons for a low credit score and what you can do to fix it.

But first a quick FICO lesson.

How Are Credit Scores Calculated

Your credit score is a 3 digit number created by an organization ( most commonly FICO (Fair Isaac Corporation) ) that uses the information received from the credit bureaus to determine the risk level of companies lending to you.

Think of your credit score as your financial g.p.a. It tells institutions how well you’ve been managing your credit.

The specific details on how the score is derived is proprietory information they hold close to their heart, but they did share with us these details.

Taken from the website, the largest factor that impacts your score is your payment history – how well you have been making your payments over time, followed by how much you owe on your accounts. How long you have had credit comes next, and then there is equal weight on the mix or different types of credit you have and how much new credit you have applied for.

On the surface, it seems like fairly random detail, especially since none of it mentions how much money you have in the bank, how much you get paid etc. But FICO looks at the activities in each of the 5 categories to play amateur psychologist and fortune teller about your future behavior.

If you remember nothing else, then remember this; your credit score is used to predict the likelihood that you will default on a loan in the future. The lower your score, the higher the risk of a financial institution lending to you. The higher the score, the ‘safer’ or more likely it is that you’ll pay back what is owed.

So when calculating your credit score, every piece of information that is supplied to the bureau is analyzed to determine if something is happening in your life that would cause you cut and run without paying back your debt.

1. You Missed A Payment (or 2)

Since past behavior is the strongest predictor of future behavior – the highest factor influencing your credit score is your payment history accounting for 35% of your overall credit score.

These little occurrences can demolish your score costing you as much as 100 points if you have excellent credit with no blemishes.

When the bureau sees that you have a recent missed payment, or multiple missed payments lately, then they start wondering if you might be having financial trouble. Maybe you lost your job, or just can’t be bothered to pay your bill anymore, or maybe you got kidnapped by aliens and won’t be around to make payments. Maybe you just forgot.

Either way, it doesn’t matter to the bureau or to FICO and they don’t ask. They assume your miss payment is the start of drama and lower your score.

How To Fix Missed Payments

If you’ve missed a payment, then the first thing to do is to get current. Make your card payment ASAP, and set up automatic reminders or paymentS to ensure you don’t miss any more payments.

Then call the company that reported your missed payment and ask them if they would remove the entry on your credit report. You might have to send an email, or mail in a letter, so be ready to get the details on where to send if that’s the case. 

Note: Don’t buy into the notion that it can’t be changed after it has been reported. Your company made the entry and it’s well within their power to remove it. Sometimes they’ll do it, sometimes they won’t. If they decide not to help, then don’t sweat it, just wait for it to fall off your report.

As time passes, previous offenses factor less on your score i.e. it becomes old news. If you don’t have any more late payments FICO will see it as a ‘one-off’ instance and your score will improve.

2. You have an error that you don’t know about

You’d think that for something as important as your financial future that these large financial institutions never make a mistake on your credit report, but you’d be surprised.

The Federal Trade Commission ran a study on the accuracy of credit reports and found that one in five consumers had an error on at least one of their credit reports. 

Most errors are harmless. A misspelled name, old address, etc. but some can cause serious damage to your credit score – like a company reporting non-payment of a bill that you already paid off, etc.

How to Fix Errors

I’m sure you’ve guessed it, but I’ll say it anyway. Pull your credit report from each of the three bureaus. If you are just looking to improve your finances and want an idea of your score, then get it quick, safe, and for free at creditkarma. This is a great way to get educated on your credit without paying for it. Yeah.

If you’re fixing your credit because you’re about to apply for a mortgage, student loan or car loan, then you’ll want to get the score that creditors are using. You can get them all together and get access to your credit score (data that 90% of lenders use) by using MyFICO. It’s as close as you’ll get to what creditor’s look at.

Each year you get a free credit report from each of the three credit bureaus using the site Note this is just your credit report, not your credit score.

Once you get your report, go over it with a fine-tooth comb making a note of any discrepancies that you find.

If it’s with an actual company that you have worked with, then give them a call to get the error fixed. If it’s a with a company you have no knowledge about, then file a dispute with the bureau that has the error.

You can do this on the bureau’s website or by sending in a formal letter disputing the error.

3. You have a high debt balance 

The most important non-payment category in your credit score is the amount of debt that you carry. And while all your installment debt (auto loans and mortgages) are factored into your scores, it’s really your credit card debt that’s the most damaging.

Owing a lot, especially on high revolving debt, can suggest to FICO that you are in a bad financial situation.

It may or may not be true, but seeing high utilization suggests 1. you are in financial difficulties and are using a lot of credit trying to stay afloat, 2. you borrowing too much money and might lose control of paying it off or 3. you are dangerously close to being 1 bad day away from having a really bad year. 

The Fix for High Utilization

Paying down your credit card debt can be a huge boost to your credit score. And you don’t even have to pay it all down to see the effects.

If you can, then sure go ahead and get to debt-free, but you can improve your score by keeping your credit card utilization on each card below 20% (under 9% would be better, but you get the idea). The lower the better.

If you are strapped for cash, you can quickly lower your utilization by requesting a credit limit increase from your current creditors. A higher available limit will help you for a short time, but be careful. It’s a bandaid, not a fix.

This shows FICO that you are not only responsible for your credit but you aren’t maxed out and in a financial crisis.

4. You haven’t had credit for long

Your age doesn’t matter.

The length of your credit history is measured by averaging the ages of your loans and credit cards.

The longer you have had credit for is the more information that FICO gets on your past history. Longer credit reports also show more experience with credit over time and that you can handle credit responsibly.

Think about it. Who would you rather lend your car to? Someone with 6 months driving experience? or someone with 20 years driving experience?

How To Get A Longer Credit History

Some things just take time. If you’ve only been using for credit for a few years then FICO doesn’t have much to go off of. You can’t speed up time to improve your length of history but you can use some techniques to help you along

Getting added as an authorized user on the credit card of someone with a long and good credit history can help boost your score. Think of it as awesome by association.

If you have someone with very good credit and they are willing to add you as an authorized user to one of their credit cards then their long positive history can be reflected on your credit report as well.

Woo hoo! Imagine the impact of 15 years of positive history showing up on your couple of years old credit report. Sure it only counts for 10% of your score, but that could be the difference between qualifying for a loan or not.

Just be careful. If your friend start having issue with their credit, like racking up credit card debts on the card, then your credit score will be impacted too (even though you wouldn’t be responsible for paying the debt).

5. You only have credit cards or only loans

Creditors want to see that you are able to hand long-term loans, short-term loans, revolving loans a lot etc. and the more information they have, the better they are at predicting your likelihood of defaulting on a loan.

If you think about it, it makes sense.

If you only have credit card debt (revolving debt) then it’s hard for them to determine how you would handle a long-term mortgage debt for example. Likewise, if you’ve been great at paying down your mortgage and car note, but never had a credit card, then it doesn’t give much information on how you’d handle a credit card.

Remember how I said that the credit score allows companies to play amateur psychologist? Well, maybe you make your car and house payment because you know the bank can come and take your house and car if you stop paying. But with a credit card, a bank can’t come back and repossess the pizza you bought and ate last month. So maybe you wouldn’t make a card payment knowing they ‘technically’ can’t hurt you if you don’t pay.

It’s all guessing. But it does have an impact on your score.

How To Improve My Credit Mix

Where ever possible try to have a good mix of debt and use the right debt for the right purpose.

For example, a student loan to cover student payments, auto loan to cover an automobile purchase, or even using a personal loan to consolidate revolving credit card debt can be helpful in balancing out and improving your score.

Now I’m not saying go out and get a loan that you don’t need just to fix your credit. This factor is only about 10% of your score, and if you have any of the other issues, then fixing those are likely to yield higher rewards. But if you’ve completed the other fixes and consolidating your credit card would be beneficial, then don’t knock the idea.

Also keeping with the idea of improving your mixes. If you decide to get a loan to help build/rebuild your credit just know that the size of the loan doesn’t matter.

You could take out a secured loan for a small amount (like $500) and make the payments on time to boost your score and show you can handle different types of debt.

6. You apply for too much credit too quick

Each time you apply for credit it’s reported to the credit bureau. If you have too many credit inquiries it suggests that you are possibly in a difficult financial situation and are searching for money to borrow (a.k.a access to credit).

You might just be applying for a card because you were excited a company sent you one, or maybe it’s coincidental, or just a time in your life of high credit use – like buying a house, then needing to buy furniture. Whatever the reason, the bureau doesn’t try to understand the reason, they just go off the data.

How To Fix Excessive Inquiries

Be careful of how much credit you apply for and how frequently. Don’t apply for cards or debt without taking the time to fully consider. If you’ve already applied, then there isn’t much you can do. The hit is already to your credit and it can be difficult to remove.

But don’t worry. As we have said throughout the article, sometimes you just have to wait for events to ‘fall off’ your credit report. Over time, the event will have less impact and your score will bounce back.

Note: When buying a house or a car, FICO treats these inquiries differently. They know people are applying for the best rates, and so card and mortgage inquiries that happen within a 2 week period are flagged as one.

7. You’ve had some trouble in the past

Your credit reports show your financial history over several years, and certain information lasts longer than others. For example, a credit inquiry stays on the report for 2 years, however, a chapter 7 bankruptcy can last as long as 10 years on your credit report. Meanwhile a foreclosure and chapter 13 bankruptcy last 7 years.

But many events can wreak havoc on your credit score – getting sent to collections, having your loans charged off (credit companies closing your accounts since they figure you won’t pay them back), defaulting on loans etc.

The more recent the event, the higher impact it has on your score. So if you just got a foreclosure last year, then expect your score to be pretty heavily impacted for a few years.

How to Fix Bad Events on My Report

Wait it out.

Wait until the impact of the event becomes less relevant. In the meantime, make the payments on time for any of the credit cards that you have. you can work on getting a small secured loan from a credit union or small bank to start rebuilding your positive credit profile and implement to other fixes.

Over time your score will start to improve.

8. Closing Your Credit Cards

Closing your credit cards can be harmful to your score for a few reasons.

  1. It lowers your credit utilization value – your credit utilization measures how much credit you owe vs. how much credit you have access to. For example, say you have 2 credit cards, one with $200 limit the other with $800 limit and you owe $100 on your $200 card. Your credit utilization would be 10% (100 (amount owed)/1000(total amount of available credit)*100) If you closed your $800 card, then your utilization would become 50% (100(amount owed)/200 (available credit). Yikes.
  2. and also because it removes from the mix some good history you might have had on that card. If you have years of good payment on this card, then removing the card removes it from the credit score equation.
  3. Lowers your length of credit history. If the card you closed was your oldest card, then expect to get a credit hit since your history length will now be lower.

How to Prevent Closing Accounts from Impacting My Score

If you no longer want your credit card then consider cutting up the card or simply never using it, as opposed to closing the account.

But if you truly must close the credit account, then do it wisely. Make sure to pay off the balance in full before you attempt to close it. Also, try to either pay down some debt on your other cards or get your credit limits on other cards increased by, at least, the credit limit of the card you want to close. That way your credit utilization will not be heavily impacted.

If the card is your oldest account then consider waiting a little longer until your next oldest card catches up to the age of this card – if that’s possible.

Either way, sometimes you have to cut ties. And just as will any event, over time it will pass and your score will bounce back.

Now You Are Ready

Your credit score is fluid.

You might have a bad score today, but remember it is just a snapshot of the current details on your credit report. It changes over time and as you continue to live your life and make good financial choices, it will improve.

You don’t need to obsess about your credit score. Just follow the basics of examining your credit report every year, checking your score every once in a while, making your payments on time, keeping your debt level low, and being thoughtful about any new debt is enough to keep you on the right track.

You now have the knowledge you need to make some changes in your credit score. Now you just need to get to work.

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