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Poor Credit Score: Why You Have it and What to Do About It

If you have a poor credit score. you'd probably like to improve it. Poor credit can be extremely costly, because borrowers with low scores pay much higher interest rates than those with fair, good or excellent credit. But it's worse than that -- people with bad credit don't just have a hard time getting mortgages -- they often have difficulty even renting! Landlords, insurance companies and even employers are likely to look at your credit when deciding if they want to hire, insure or rent to you.

Top Reasons for Poor Credit

Poor credit scores happen for many reasons -- for example, a short credit history, too much credit, balances that are excessively high, or lots of inquiries -- but the most common reason for a low credit score is missing or past due payments. Here are the ten most common reasons for low credit scores:

  1. Serious delinquency
  2. Serious delinquency, and public record or collection filed
  3. Derogatory public record or collection filed
  4. Time since delinquency is too recent or unknown
  5. Level of delinquency on accounts
  6. Number of accounts with delinquency
  7. Amount owed on accounts
  8. Proportion of balances to credit limits on revolving accounts is too high
  9. Length of time accounts have been established
  10. Too many accounts with balances

Bad Credit History

Notice that six of the top ten reasons for bad credit have the word "delinquency" in them. If that's your problem, you won't improve your poor credit score until you begin paying your bills on time. For credit reporting purposes, "on time" means within 30 days of the due date. If you have trouble doing this, consider setting up automatic payments from your checking account so that you don't miss a due date.

If you have collection accounts (usually the cause of a "serious delinquency"), contact the agency about paying them – and try to get them to agree to remove the derogatory entry from your credit report. They may tell you they can't do this, but in fact they can. Pay newer collections first -- older ones don't do as much damage as newer ones.

Bad credit doesn't usually happen overnight, and it doesn't

go away overnight either. Your best plan is to create some good history now, which will be weighted more heavily than past bad behavior. That might require new kinds of credit, like a secured card from an issuer that reports to credit bureaus. As your credit score improves, you'll receive better interest rates and better credit card offers.

You'll definitely want to monitor your credit score and accounts as you take control. Watching your score improve month by month should help keep you motivated. Luckily, that's easy to do at You can check your credit score for free any time you like, with no obligation and no credit card required. Scores are updated every month.

Too Much Debt

Three of the top reasons for bad credit involve debt loads that are too heavy -- using too much of your available credit, carrying balances on too many accounts or owing too much money. This is a big deal because carrying balances, maxing out credit lines and applying for more credit is a strong indication that your spending habits are unsustainable. Keep it up and eventually you're likely to default or file bankruptcy.

One major survey indicates that on average, people with credit scores under 620 use 71 to 100-plus percent of their available credit, while those with good or excellent scores use 30 percent or less. If you have $4,000 in available credit, and you've got a $3,500 balance, your utilization is very high -- $3,500 divided by $4,000 = 87.5 percent. Your goal should be to pay it down to $1,200 or less. Monitor your credit score monthly and watch it rise as you reduce your balances. You can do this for free at LendingTree, and checking it frequently should help you stay on track.

Another way of decreasing credit utilization is to consolidate debt with a personal loan or home equity loan -- zeroing credit card balances and adding a new installment account. However, this strategy does not work for about 75 percent of people who try it because they are unable to do the one thing that will get them on the path to financial health and a good credit score -- stop overspending.

Credit Scores are totally free!

Category: Credit

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