Monday, January 25, 2021

What Causes a Poor Credit Score

Your credit score is your grade as a credit user. If you’ve got a poor credit score, it could prevent you from taking out loans, taking out a mortgage, renting a property, getting insurance, or even taking out a phone contract. There are even some employers that run credit checks on applicants - so it could prevent you from getting a job too. All in all, it could hold you back from achieving many things in life.

Everyone has a credit score. Most credit score lenders use the FICO score scale, which is between 300 and 850 (anything below 579 is considered poor). There are many sites and apps that can allow you to check your credit score.

A number of different things can affect our credit rating. Understanding these factors could be useful when trying to improve your score. Below are just some of the things that can cause a poor credit score - and the numerous ways in which you can improve your score, so that you can have more financial freedom.

Missed payments on bills and loans

One of the biggest things that can reduce your credit score is missed payments. Every time you don’t pay a bill on time, you can expect to lose points from your score. 

Bills and loans that aren’t paid for long periods can cause the most damage. A single bill that hasn’t been paid for thirty days or more could cause your credit score to seriously drop - even if you usually make every payment on time.

Missed payments can stay on a credit report for up to seven years. By learning to budget, you can make sure that every payment is made on time. If you do think you’re going to miss a payment, make sure to warn the creditor in advance - in some cases, this could save you having your credit score affected. If you do miss a payment, try to pay it up before thirty days pass (some lenders won’t report a late payment to the credit bureaus unless you’re 30 days behind).

Paying bills consistently on time can improve your score. If you want to improve your score quickly, it could be worth trying a credit-builder loan from a bank (these loans are paid off over a year - if you make every payment on time, the bank will notify credit bureaus and your credit score should vastly improve).

Too many debts

Having a lot of debt doesn’t necessarily harm your credit score. In fact, relying on multiple forms of credit - including installment loans and credit cards - can be good for your credit score. However, if you’re frequently borrowing large amounts at a greater rate than you’re paying them off, credit bureaus may start to think you’re getting financially desperate and this could start to harm your score.

Maxed out credit cards can do a lot of damage. If you do have a credit card, try to only borrow small amounts on it so that it doesn’t reach its limit. In fact, it’s recommended that you only borrow up to 30% of your credit limit to keep your credit score high (which is easier said than done). 

Overdrafts tend not to have much impact on your credit score. However, if you frequently exceed your overdraft limit, it could start to damage your score. This could be something to be wary of if you live in your overdraft.

By learning how to borrow wisely, you can improve your credit score rather than damaging it - see here about the dos and don’ts for debt. Taking steps such as consolidating debt and reducing credit card debts could make a big positive impact. 

No credit history

If you’ve never borrowed money before and you don’t have any recurring bills, you may find that your credit score is poor. This is because you have no credit history to base your score off of - and so credit bureaus have no idea of whether you’re financially responsible or not. 

Many young people fall victim to this when trying to apply for their first loan or trying to take out auto insurance or rent their first home. The solution to this is to build a credit history - as soon as you start paying off debts and bills on time, you’ll prove to credit bureaus that you’re a responsible spender and your credit score will shoot up.

Getting a credit card is one of the quickest and easiest ways to build a credit history. Some banks offer credit cards to young people who may not have a credit history (being a student or having a job may be a requirement in some cases). Setting up an overdraft, using it, and paying this off could also give you some credit history.

Applying for credit frequently

Every time you apply for a loan, there’s a chance that your credit score may be damaged. Getting rejected by a lender will generally have the biggest negative impact; however, you may lose a couple points even if you are accepted but choose not to take out the loan. 

Any damage to your credit score from applications alone tends to be minimal. However, if you’re constantly applying for loans, you could start to see a more serious effect taking place. This is because making lots of applications makes it look like you’re constantly in need of borrowing money.

When applying to multiple lenders at the same time (such as applying to car finance) you’ll usually only lose a point or two. However, if you’re making different applications to various lenders every week for different purposes, your credit score is likely to drop more noticeably. 

Only apply for credit when you need it. To avoid application rejections (which will have a bigger negative impact than accepted applications) research into lenders before applying. Some will advertise that they offer loans to people with poor credit, so there’s less chance you’ll get rejected if you apply to these. Generally, these loans tend to have high-interest rates, so just be careful if you do take out one of these ‘bad credit’ loans. 

Missing/mismatched personal details

If details such as your name or address are missing from public records - or they don’t match up - this could also have a negative impact on your score. This is always something worth looking into. 

Firstly, consider whether you are on the electoral register. Some credit bureaus check your accounts against information included on the electoral register - if you aren’t on the electoral register, credit bureaus won’t be able to do this. As a result, not being on the register could result in a low credit score. Sign up if you’re not already to see what impact this makes (being on the electoral register doesn’t mean that you have to vote). 

Mismatched information can also harm your credit score. If you’re married and your married name is on the electoral register, but you still use your maiden name on your bank account, make sure that this information is updated to avoid it from harming your score. Similarly, make sure that an account or card isn’t still registered to an old address. Credit bureaus do not like mismatched information because it could suggest that something dodgy is going on (some people try to change their name and address to escape debts!). 

Identity theft/mixed credit files

If none of the above seems to be the problem, consider whether you may have been a victim of identity theft. It could be possible that someone has applied for a loan or credit card in your name and then refused to pay back the debt. Usually, if this happens you’ll receive bills or final payment letters to your address, but some fraudsters may manage to apply with a different address so you never get these letters. You can find information here on what to do if you think you’ve been a victim of identity theft

In other cases, credit files can be mixed. Your credit file may get mixed up with someone who has exactly the same name as you (this is more likely to happen if you have a very common name such as Robert Smith). This is a fault of the credit bureau themselves - it could be worth enquiring with credit bureaus just to check. You may be able to make a dispute in court to reverse any damage caused by this. 

Taking on other people’s bad credit

Sometimes a credit score can be damaged as a result of taking on someone else’s debts or sharing a joint account with someone who has a very bad credit score. 

As a rule, you should always avoid taking out loans for other people. If they fail to pay you on time and you end up missing payments, it will be your score that is affected. Let these people take out their own loans (if they’re unable to do so, it’s probably because they’ve got a bad credit history themselves). 

When it comes to joint accounts, avoid setting one up with someone that has a bad credit score - you’ll be ‘co-scored’ and your credit scores will become linked. Don’t let someone else’s bad spending behavior negatively affect your score. 

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