What Are the Causes of a Low Credit Score?
Your credit score is a mathematical algorithm that takes certain factors into account when measuring risk. Knowing how your financial history accounts for this score can help you avoid the consequences of poor, often irreversible, credit.
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Payment History (35 Percent)
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Payment history is how you pay your bills. And not just credit cards, but mortgages and loans as well. Late payments, not paying at all, or having an account sent to third-party debt collectors are reported to the credit bureaus and drive your score down fast.
Credit Utilization (30 Percent)
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This is the ratio of your current debt to your credit limit. A high credit balance raises credit utilization (bad) and paying off debt lowers utilization (good). Maxing out (100 percent utilization) and closing credit cards that have active balances can hurt your credit.
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Length of Credit History (15 Percent)
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The longer your credit history is, the better. An older credit history implies that you pay your bills, which improves your credit.
Types of Credit Used (10 Percent) and Credit Inquiries (10 Percent)
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As of 2009, you can earn points for successfully managing different types of credit, such as installment, revolving (credit card), and consumer finances. However, multiple inquiries for a new loan or line of credit can lower your score.
Other Things That Hurt Your Score
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When a creditor is forced to take legal action against you (judgment), write off your debt as a loss (charge-off), or if you file for bankruptcy, your score could be ruined for years.
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