What Are the Common Causes of a Low Credit Score?

Among the important things to manage in your life, your credit score holds a hefty weight on finances. Whether applying for a loan or a credit card, your credit score decides your eligibility.

A high credit score opens up a lot of options for your financial needs. Loans and insurance plans bank on your credit score before availing them. A low credit score reflects badly and lowers your chances with loans. 

What actions would cause your credit score to plummet? Today, we look at these actions to help you see what you should watch out for. We will also look into some ways to push your score back up. 

Read on and learn how to improve your finances:

There are several different reasons why you have a low credit score. You can learn more about these causes along with what to do right here.

Late and Missed Payments

One of the leading low credit score causes is payment delays. Coming in with late payments can hurt your credit score. After all, 35% of your credit score comes from your payment history. 

A single late or missed payment can drop your credit score, more so when you have consistent late payments. It tells the credit industry that you’re not good with finances.

In situations when you have a due past 30 days, credit issuers will report that delinquency to one of the major credit bureaus. The moment it reaches 60 to 90 days past due, the score drops even further.

It could lead to other financial problems. For instance, they will send your account to collections. They will then send a third-party company to collect the payment for your balance. 

They will record all late or missed payments into your file. It’s a dangerous situation since it stays there for about seven years.

The best countermeasure is to send your payments on time. It means paying before the due date hits. It’s the only way to improve a credit score.

Maxed-Out Credit Card

If there is one thing that can cause a bad credit score, it is a maxed-out credit card. Going over your credit limit can impose other penalties. These go beyond a major dip in your credit score.

For instance, it gets harder to get approval for loan applications. Having a high debt-to-income ratio can disqualify you from a mortgage. On top of that, any chances of paying off the debt get harder.

You would also encounter other penalties because of maxed-out credit cards. For instance, you have a higher minimum payment when settling the balance. You also have a penalty rate that could come from your bank, pushing to as high as 30% or more.

In the end, it leaves your credit card useless. As much as possible, never max out your credit card. The consequences are too heavy.

Filing for Bankruptcy

Filing for bankruptcy is a major cause of a low credit score due to its implication. Bankruptcy is an extreme financial measure and may prove devastating, especially considering the amount of time the record stays on your credit score. 

Bankruptcy comes in two types: Chapter 7 and Chapter 13 Bankruptcy. Filing for a Chapter 7 Bankruptcy means eliminating most debt through asset liquidation. Meanwhile, a Chapter 13 Bankruptcy means going through a three- to five-year repayment plan.

Before filing for bankruptcy, weigh your options first. Check for alternatives on the matter, such as consumer credit counseling. Bankruptcy must be the last resort, since it leads to poorer financial options.

Charged-Off Account

A common low credit score cause to watch out for is charged-off accounts. It happens when a creditor thinks you have no intention of paying your credit card bills.

In this situation, the creditor wrote you off. While it may seem like you no longer have a debt in place, it’s something that should scare you. With a charged-off account, your credit score suffers immensely.

Similar to missed payments and bankruptcy, a charged-off account would stay on your record for about seven years. You can still pay off the balance to lessen the impact. However, it’s still better to avoid the situation in the first place.

Defaulting on a Loan

Similar to a credit charge-off, a defaulted loan can reflect badly on your credit score. In this case, a defaulted loan shows that you don’t intend to fulfill your end of the contract. It also means you chose to not pay the money.

Foreclosure

Having your home foreclosed hits as hard as a loan default. It also marks you as a high credit risk and leaves you with a bad credit score. 

High Credit Card Balance

While not as close as having your credit card maxed out, a high credit card balance can hurt your credit score. It also increases your credit utilization, which is the aspect used to measure your level of debt. A lower credit card balance could do you well, so consider going for that.

How Do You Raise Your Credit Score?

Improving a credit score involves a set of good practices. These practices help build credit as you continue to do so. One is to pay your bills on time, ensuring you don’t hit the due date.

Another is to monitor your credit and minimize your debt. That means not relying too much on your credit card. You can also go for fast credit repair to help avoid these problems.

Rise From Your Low Credit Score Today

Having a low credit score can make your financial situation worse. Prevent this through good financial practices and habits. Never rely too much on your credit card, and make your bill payments on time.

A good credit score can make things easier for you. It also opens up more options for loans and other financial needs. It’s a good investment, especially when you’re looking for instant financing in emergencies.

Did you find this useful? You can check out our other articles where we cover a wide variety of topics, such as this one.

Author: SHABL

Rob has been traveling the world and living abroad for over a decade. The goal was to stop having a boring life and it turned into something far greater. He's worked with national tourism boards and been mentioned in National Geographic. These days he lives abroad and loves business, technology, the tropical lifestyle, good food and travel.

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