Why Is My Credit Score So Low?

How late payments affect your credit score

By Michelle L. Black

Life can be full of surprises — some good and some bad. Yet no one wants the surprise of finding out their credit score is low when they thought it was in good shape.

A bad credit score can complicate your financial life in many ways.

First, poor credit might make it challenging to qualify for new loans, credit cards, apartment leases, and sometimes even affordable insurance premiums. When you do qualify, a low credit score could also cause you to pay hundreds or even thousands of dollars more for the financing and services you need.

Of course, figuring out the exact reasons why your credit score is low isn’t always easy.

Read on to learn about common causes of low credit scores, how to figure out what’s holding your personal numbers back, and expert strategies you can use to improve a less-than-stellar credit rating.

In this article

Credit score basics

The credit scores that most lenders use in the United States — namely FICO and VantageScore credit scores — generally feature a scale of 300-850.

At present, top lenders use FICO® credit scores in 90% of their credit decisions. Lenders, credit card issuers, and other companies use these scores to help them forecast the risk of loaning you money.

FICO and VantageScore credit scores help businesses answer an important question when you apply for new financing:

“How likely is the applicant to pay a credit account obligation at least 90 days late during the next 24 months?”

The answer to this question indicates your risk as a borrower. Lenders, who rely on customers repaying the money they borrow on time, typically prefer to do business with low-risk borrowers.

If your credit history shows that you’re more likely to pay your bills on time, you’ll earn a higher credit score.

Good credit scores simply mean you’re a better credit risk.

Lower credit scores, by comparison, indicate a higher likelihood of you paying a credit obligation 90 days late (or worse) in the next two years.

What is a low credit score?

Like beauty, bad credit is in the eye of the beholder. In other words, each lender and credit card issuer sets its own rules regarding what it considers to be a low credit score (and an unacceptable level of credit risk).

If your credit score falls below a lender or card issuer’s cut off point, you won’t qualify for a new account.

Although the definition of a low credit score can change depending on who’s reviewing your numbers (and which credit scoring model the lender is using), the scale below can be helpful. In general, your credit score will fit into one of five basic categories, per Experian.

FICO FICO Rating VantageScore VantageScore Rating
800-850 Exceptional 781-850 Excellent
740-799 Very Good 661-780 Good
670-739 Good 601-660 Fair
580-669 Fair 500-600 Poor
300-579 Very Poor 300-499 Very Poor

If your FICO Score falls below 670, you may have reason to be concerned. The same is true if you have a VantageScore credit score under 661.

Even a “good” credit score probably shouldn’t be your ultimate goal. When you work hard to earn an exceptional or excellent credit rating, you could save money and enjoy other perks.

Also remember that credit scores aren’t static. They’re a snapshot evaluation of your risk level at a given moment in time. Just because you had a low credit score the last time you applied for a loan or credit card doesn’t mean your credit rating is doomed forever.

When the information on your credit report updates — as it generally does on a monthly, weekly, or even daily basis — your credit score may also adjust the next time someone checks it.

Troubleshooting a low credit score

Improving your credit score is easier if you understand why it’s low in the first place. To start investigating the root of your credit score problems, download and review your three credit reports.

For credit report freebies, visit AnnualCreditReport.com. You can use the website to access a free credit report from each of the three major credit bureaus — Equifax, TransUnion, and Experian — once every 12 months. You have the right to these free reports courtesy of the Fair Credit Reporting Act (FCRA).

Through April 2021, the credit bureaus are also offering free weekly credit report downloads on a voluntary basis in response to the COVID-19 crisis.

Aside from your reports themselves, it’s also helpful to review your credit scores. The FCRA doesn’t give you free annual access to your credit scores, only your reports.

So, if you want to view your credit scores, you may have to be a little more creative.

How to access your credit scores

Here are 4 different ways to check your credit scores.

1 - Self Financial credit monitoring

Self customers with a credit score can use Self’s credit monitoring tool to track your VantageScore 3.0 (based on your Experian credit report). Download the app from iOS or Google Play to get started.

2 - Paid credit monitoring services

Paid monthly credit monitoring subscriptions will often give you monthly or quarterly access to your credit reports and scores.

Some services will let you review all three credit reports at once, along with their associated credit scores (FICO or VantageScore). Other services may offer more limited access.

At myFICO.com, for example, you can access a quarterly three-bureau credit report plus 28 FICO Scores for $29.95 per month.

3 - Free credit services

There are numerous websites where you can claim a free credit score online. Generally, you give the company permission to market financial services to you and you receive a no-cost credit score or report in exchange.

You’ll need to sign up for multiple services if you want to keep tabs on all three of your credit scores this way.

4 - Your credit card issuer

If you have a credit card, the issuing bank likely checks your credit score every month to keep an eye on your changing risk level. These are known as account maintenance credit reviews.

Many card issuers will give you free monthly access to these same credit scores as a customer benefit.

Hundreds of credit scores

There are hundreds of credit scores on the market. So, no matter where you find credit scores online, they might not match the numbers a lender sees when you apply for financing.

Even if you purchase FICO Scores online, a lender might use a different version or score type when it reviews your application.

Still, monitoring your credit scores online can benefit you. If you check your credit score and it’s low, the score a lender pulls would likely need improvement as well. And, if you’re working to improve your credit, monthly report and score checks can be an effective way to track your progress.

Learn more about the different types of credit scores here.

Look for reason codes

Depending on the credit report and score, it may contain “reason codes” that explain why your credit score isn’t higher. A reason code is simply a two-digit number that comes alongside a short statement.

You can usually find reason codes near the top or bottom of your credit report — wherever your scores appear.

If you apply for credit and a lender denies you based on your score, you’ll receive an “adverse action” notice in the mail featuring your credit score and reason codes as well.

Reason Code Examples

FICO VantageScore
21: Amount past-due on accounts 31: No open bank card accounts
38: Serious delinquency, and public record or collection filed 39: Presence of severe delinquency/derogatory status on accounts
18: Number of accounts with delinquency 85: Too many inquiries on credit report
09: Too many accounts recently opened 24: Too many bankcards with high balance compared to credit limit

Credit score reason codes can help you identify problem areas on your credit report and build a plan to start recovering.

Why did your credit score drop?

Your credit score can change anytime the details on your credit report change.

When your score drops, it means something happened on your credit report to make FICO or VantageScore believe that you’re less likely to repay the money you borrow as promised.

Below are five common reasons why your credit score might decline.

1 - You made a late payment

One of the first actions you should take when your credit score drops is to check your credit report for new late payments. Paying your bills on time is critical if you want to avoid low credit scores.

Payment history makes up 35% of your FICO Score and it’s extremely influential with most VantageScore scoring models as well.

Delinquent payments can have a severe negative impact on your scores. To make matters worse, late payments can stay on your credit report for up to seven years.

A FICO Score simulation reveals that one new 30 day late payment could trigger a credit score loss of more than 80 points, depending on your starting score and other factors.

2 - There’s a new collection account on your credit report

Severe late payments (e.g., bills that are 120 days or more past due), may eventually lead to collection accounts. And collection accounts, especially recent ones, are a big credit score no-no.

Sadly, paying a collection won’t erase it from your credit report. But if you already have collection issues it may comfort you to learn that the older these derogatory accounts become, the less they will impact you.

The FCRA also puts a time limit on the reporting of negative collection accounts. After seven years (from the date of default on the original account), collections must come off your credit report.

3 - Your credit utilization ratio increased

How you manage your credit card balance-to-limit ratios, called credit utilization, is another factor that affects your credit score in a major way. Research shows that people who use more of their available credit card limits are more likely to make late payments in the future.

Your credit card issuer will update your balance and other account information with the credit bureaus each month. So, if your credit report shows that you’re using more of your available credit limit than you were previously, the change could lower your score.

When you work to pay down your credit card balances, however, you can lower utilization rates and potentially reverse any credit score damage.

4 - You’re applying for new credit too often

There’s nothing wrong with strategically applying for new accounts when you’re trying to establish credit. It’s also fine to apply for new loans, credit cards, or other types of financing when you want to take advantage of a good offer.

But if you seek new credit too often, your score might suffer.

When a business checks your credit report as part of an application for financing, it’s called a hard credit inquiry. Hard inquiries appear on your credit report, and too many of them in a 12-month period might have a negative impact on your credit score.

But you never have to worry about checking your own credit reports. Personal credit checks are soft inquiries and have zero credit score impact.

5 - Someone made a mistake

Low credit scores don’t always mean that you did something wrong.

Sometimes credit problems happen because someone else made a mistake or tried to take advantage of you. A creditor or collection agency, for example, could report incorrect negative information to a credit bureau about you.

Even the credit bureaus themselves can slip up.

You could also have fraudulent information on your credit report if someone steals your identity.

Unfortunately, FICO and VantageScore can’t tell the difference between legitimate information on a credit report and a blunder. If negative details show up on your credit report, the scoring model will assume the information is accurate and your score may suffer accordingly.

This is why it’s so important to review your three credit reports for errors frequently.

If you discover incorrect information, you can dispute those mistakes with the appropriate credit bureau. This Federal Trade Commission guide can show you how.

Next steps

When you know your credit is less than perfect, it can be tempting to ignore the problem. But avoidance isn't a good strategy to follow where your credit scores are concerned.

Even if it’s stressful, you’re better off knowing in advance where your credit stands. So aim to check your three credit reports often. (Once a month is not overkill).

By facing the problem head-on, you can make a plan to start boosting your score little by little.

Finally, it may also help you to review the factors which influence your credit score most. If you understand the behaviors that make scoring models like FICO and VantageScore consider you a high-risk borrower, you can set out to change any bad habits and build better credit for the future.

Need to build your credit? Self provides a step-by-step credit building process that could help you do just that. Learn more at self.inc

About the author

Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication.

Written on November 10, 2020

Self is a venture-backed startup that helps people build credit and savings.
Comments? Questions? Send us a note at hello@self.inc.

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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