Your credit score is a critical factor in whether you can obtain a home loan or a new credit card or, in some cases, open a bank account or find affordable car insurance. Making payments in a timely manner and otherwise handling debt in a responsible way typically drives your credit score up. Making late payments can impact your credit score for the worse.
But sometimes credit scores remain the same or even drop and you don’t know why or how to fix the issue.
One of these seven factors may be at play, and you can generally take some type of action to mitigate each.
1. You’re using too much of your available credit
When you have revolving credit accounts, such as lines of credit or credit cards, lenders want to see that you handle them responsibly and don’t seem to rely too heavily on credit to meet day-to-day obligations. High utilization of credit – which just means you’re currently using a large amount of the credit available to you – makes you seem like a risk. And it can lower your credit score.
In fact, credit utilization accounts for 30% of your credit score. To keep that in perspective, payment history (whether you pay your bills on time) accounts for 35%. These two factors together have the majority impact on your score, so you need to pay attention to both.
Using 30% or more of your available credit at a given time puts you in high utilization territory. Consider the following example:
- Credit card A has a limit of $5,000 and a balance of $3,000
- Credit card B has a limit of $1,000 and a balance of $0.
- Credit card C has a limit of $900 and a balance of $800.
- Total available credit: $6,900
- Total credit used: $3,800
- Credit utilization: 55%
- Even though you have one card without a balance at all in this scenario, your total credit utilization is high and may negatively impact your credit score
Using around 10% or less of your available credit is ideal. In the example above, that would mean running balances of $500, $10 and $90 on each of those cards.
Remember, that doesn’t mean you can’t use your credit cards. Your balances aren’t reported in real-time to the credit reporting agencies. What it means is that you should pay down your cards regularly and avoid carrying over high balances month-to-month when you’re trying to improve your credit score.
2. Your credit history includes a negative item
If everything is ideal with your finances at the moment, a low or stagnant credit score could be due to a major negative factor in your credit history. Foreclosures, defaults and bankruptcies drive your credit score down and remain on your record for years.
The good news is that most of these negative items fall off your report after a maximum number of years, often seven. Meanwhile, keep making timely payments and managing money in a positive way, and eventually, you’re left with a strong financial situation likely to create a higher credit score quickly.
Meanwhile, you can receive financial and legal advice to repair your credit.
3. Your credit history isn’t diversified enough
Credit mix, or whether or not you have multiple types of accounts on your report, makes up another 10% of your credit report. Types of credit include:
- Installment accounts, such as car loans, home mortgages, student loans and personal loans
- Revolving accounts, including all types of credit cards, home equity lines of credit and gas cards
- Open accounts, such as those with utility of natural gas companies
Even if the accounts on your credit report are closed or no longer in use, they still count toward whether your credit history is diversified. If the only accounts on your credit report are revolving accounts, for example, your credit history is not diversified and your score may suffer as a result.
4. You have a trigger finger for credit apps
Inquiries can hit your credit report for two reasons:
- Hard inquiries are those backed by a credit app or other consent from you that intimates that you’re looking for credit. In short, the entity pulling your credit report is doing so for the purpose of evaluating you for a loan or account.
- Soft inquiries are simply pulls on your report for info-seeking purposes. They might be related to prequalified credit offers, existing lenders reviewing your account, or you, employers or insurance companies checking your credit history.
Hard inquiries can impact your credit score, especially if you accrue too many of them in a short amount of time. Each hard inquiry that comes from a different entity can drop your score by 5 to 10 points; that means if you shop around trying to get someone to approve you for a loan or find the best deal on a car, you could be driving your score lower (and your potential APR higher) with each credit app. To help mitigate this challenge to your credit report, hold off on applications for a while—especially if you plan to work with a broker soon to get a home loan.
5. You recently closed an account
A long history of responsible money management is good for your credit score, and the age of your accounts does play a role. For example, if you’re 30 years old and you’ve had a credit card with a small credit limit since you were in college, that credit card has a history that is a decade old. Even if you aren’t using it and you now have better credit cards in your wallet, you may want to keep the old account open simply for its age. This is especially true if all your other accounts are new.
Credit utilization can also come into play to reduce your credit score when you close an account. Consider the following example.
- You have two credit cards. One has a balance of $700 and a limit of $4,000. The other has a balance of $500 and a limit of $1,000. That means you have a total balance of $1,200 and a total credit limit of $5,000. Your credit utilization is 24%, which is below the 30% territory that is considered high.
- To simplify your bookkeeping or because the larger card has a better interest rate, you transfer the $500 to the larger card and close the card with the $1,000 balance. You still have a balance of $1,200, but your credit limit is only $4,000. Suddenly your credit utilization is 30%.
Instead, in such a situation, you might want to move the balance to the card with the lower interest rate so you can pay it off faster but avoid closing the other card. Put it in a drawer and don’t use it regularly, but let it remain open to maintain a higher credit limit (and a lower credit utilization ratio). Remember that if a credit card goes unused for an extended period, the creditor may close the account. So do take those cards out for an occasional purchase you already planned to make and pay the balance off when you get the bill to avoid accruing interest.
6. Your credit report has errors
One easy step to fixing your credit is simply ensuring there aren’t any errors on your credit report. If you make your car payment religiously but it’s reported late on your credit report, the bank may have made an administrative error. Contact them for assistance and report the error to all three major credit bureaus.
But don’t overlook other types of errors that aren’t related to payment history. A decimal in the wrong place can change the entire story about how much debt you owe, and a misspelled name or incorrect social security number can cause other people’s debts or credit histories to show up on your record. Ensuring small errors and typos don’t impact your credit score is one reason you should monitor it regularly and consider working with professionals to initiate credit disputes as needed.
7. You’re the victim of identity theft or fraud
A last reason your credit score may be tanking even though you’re doing everything right is because you’re a victim of identity theft. Keep an eye on your accounts and your credit history to ensure that all the activity listed is yours and report any suspicious activity immediately to your banks and lenders as well as the credit bureaus. You may also want to work with a professional who can help you resolve identity theft issues and work on recovering and fixing your credit.
Why does your credit score stay the same or go down?
A lot of factors can cause negative impacts to your credit score, including the age of your accounts, your credit utilization, your payment history and whether there are errors on your report.