What Lowers Your Credit Score? The Complete Guide

Your credit score affects everything from your ability to get a mortgage to a new job. Knowing what lowers your credit score is an important financial skill. To help you out, we’ll go over the most common things that lower your credit score.

Credit scores range from 300 to 850. A low credit score is anything below 669. A score of above 670 is considered good, with an excellent score ranging from 800 to 850.

From paying your bills late to which credit is bad credit, we’ve rounded up everything you need to know to avoid a low credit score.

1. Late Payments

When you apply for credit, you’re signing a contract that you’ll pay your bill on time. Late payments can decrease your credit score. The more missed or late payments you have, the lower your score will be.

Late payments show creditors that you’re a risky investment. It shows that you aren’t responsible for your finances and this makes you less creditworthy. These payments are reported to the credit bureaus each month.

If you’re going to miss a payment, call your lender, credit card company, or utility company. If you contact them, they may be able to work out a payment plan for you or lower your bill.

If they don’t know you can’t pay, they can’t help. If you work out an arrangement, they can sometimes make sure the missed payment isn’t reflected in your credit history.

2. Too Much Debt

Having too much debt isn’t necessarily bad for your credit. All debt, for example, isn’t bad debt. A mortgage is considered good debt on your credit.

A large credit card bill is bad debt. The difference is that one is an investment and the other is revolving credit. Too much debt can lower your score.

If you have a lot of store credit cards, for example, these reflect poorly on your credit. While one store credit card isn’t an issue, more than one can be. Having multiple cards with high balances and late payments will lower your credit score.

To minimize your debt, pay your balances off each month. Avoid opening multiple store credit cards. Stick to a couple of cards and make sure they are paid off. Pay your payments on time and these cards can raise your credit score.

3. Applying for Credit in a Short Amount of Time

Opening multiple lines of credit in a short period of time can lower your credit score. This could signal reckless spending or financial trouble. Each time you apply for a car loan or open a new credit card, your credit is pulled.

If you apply for several lines of credit in a short timespan, your credit score could get dinged with each application. To help avoid this, spread out your credit applications. Don’t apply for too many cards or loans in a short timeframe.

When your credit is pulled, this gets recorded on your credit report. Checking your own credit won’t damage your score but applying for too many new lines of credit will. You can check your own score, once a year from the Federal Trade Commission.

4. Defaulting on a Loan

Defaulting on a loan or mortgage can damage your credit. Defaulting means you fail to pay. In terms of a mortgage, this can lead to foreclosure.

Foreclosure or default will stay on your credit report for up to seven years. Not only does this lower your score but it also hurts your chances of getting credit in the future.

With a foreclosure or default on your credit history, it’s a lot harder to qualify for another mortgage, get a car loan, or open a new credit card.

5. Credit Utilization Ratio

Your credit utilization ratio accounts for 30% of your credit score. This ratio shows how much of your available credit you’re using. Let’s say you have a credit limit of $10,000 on your credit card. If your balance is $9,000, you’re using almost all your available credit.

Using too much credit shows you aren’t able to pay off your balance each month. This reflects negatively on your credit score. You want to pay off as much of your balance as possible every month.

Not using your credit card at all could also lower your score, so make sure you use your cards every once in a while and pay off the balance. You can also use a personal loan to consolidate and pay off debt and keep your card balances low.

Your credit utilization ratio also affects your debt to income ratio. Your debt to income ratio refers to how much debt you have in relation to your monthly income. This comes into play when you’re applying for a loan or a mortgage.

If you have more debt than income, you won’t be eligible for certain loans. With a higher debt to income ratio, you’ll also have higher interest rates.

6. Short Credit History

It takes time to build your credit. As a young adult starting out, your credit score may be lower because of your age.

Luckily, having a short credit history is only a short-term problem. The longer you have credit cards or other bills report to your credit history, the better. Your credit score improves the longer you show a good history of making your payments on time.