Your credit score reflects several factors that provide insight into how you manage credit. But a bad credit score doesn’t always mean you’ve gone overboard with credit cards or loans. In fact, you can have a low credit score even if you’ve never been in debt.
How Is Your Credit Score Determined?
FICO, the gold-standard credit score from the Fair Isaac Corp., has five components, each weighted according to its impact on your score:
- Payment history, 35%: This is the most important component because it shows whether you’ve paid your past accounts on time.
- Amounts owed, 30%: Balances at or near your credit limits suggest that you’re struggling to cover your expenses.
- Length of credit history, 15%: This component averages the ages of your oldest and newest accounts. A longer credit history can help your score.
- Credit mix, 10%: Having had a variety of credit types, from different types of lenders, benefits your score.
- New credit, 10%: A new account isn’t necessarily a bad thing, but too many can raise red flags.
Why You Can Have Bad Credit Even If You’ve Never Been in Debt
While you can get some types of credit with a score of 500 or more, anything under 580 is considered “bad” under the FICO model. Many variables go into a credit score calculation, so issues other than debt can drag down your score.
No or Limited Credit History
Fair Isaac says that a long credit history isn’t required for a high credit score. So you might not lose points if you have never taken out a loan or had a credit card, but you also won’t have a history to bolster your score.
Closing your older accounts, on the other hand, reduces the average age of your accounts, which shortens your credit history. If those older accounts added to your score, you can expect to see a drop once they’re closed.
Limited Credit Mix
FICO rewards a mix of different types of credit accounts.
Revolving accounts give you a line of credit to draw from. You can use up to the credit limit, pay it down and then use it again. Credit cards and home equity lines of credit are two examples of revolving credit.
An installment account gives you the money upfront, and you pay off the balance in regular monthly payments. Installment accounts include mortgage, auto, student, personal and home equity loans.
Having both revolving and installment accounts helps your score, and so does having different types of accounts within each of those categories. Closing an account, even by paying it off, can lower your score by reducing your credit mix. However, your score should bounce back within a few months, according to the Credit Union of Southern California.
Applications for New Credit
You may see two different kinds of inquiries on your credit report. “Soft” inquiries might verify information on an employment application or preapproved credit card offer, or appear when you check your own credit report. They have no effect on your score. A hard inquiry, on the other hand, is one you give permission for lenders to run when you’re applying for credit. It reduces most people’s credit score by less than five points, according to Fair Isaac. But if you accumulate too many in a short time, your score could take a more significant hit, especially if you have a limited credit history.
The good news is that hard inquiries lose their impact quickly. And some scoring models ignore multiple hard inquiries within a short time for the same type of credit, such as a mortgage or auto loan, so that you can comparison shop without being penalized.
Credit Report Errors
Credit report errors can hurt your credit score. According to the Consumer Financial Protection Bureau, common errors include:
- Same debt listed more than once
- Payments incorrectly reported as late
- Incorrect dates for payments, date of account opening and delinquency
- Account erroneously listed multiple times under names of different creditors
- Incorrect accounts due to identity theft
How To Fix Bad Credit
You have options for fixing bad credit, no matter what its cause.
- Review your credit report. You can get free copies of your credit reports from AnnualCreditReport.com.
- Leave your open accounts open. Older accounts lengthen your credit history and increase your credit mix.
- Avoid opening unnecessary new accounts. Hard inquiries reduce your credit score, and you might get penalized for credit shopping.
- Open a secure credit card. With a secure card, you deposit money into an account and can charge up to the amount you deposited — or more, in some cases. The card issuer will report your activity to the credit bureaus, so as long as you use the credit responsibly and pay your bills on time, your credit score will improve. Most cards require a deposit of $500 or less.
Bouncing Back From Bad Credit
A low credit score can be frustrating and seem unfair if you’ve never had debt. But having been debt-free means the most serious derogatory marks — overdue payments, which remain on your credit report for seven years — aren’t bogging down your score. Chances are that you can fix your low score by correcting credit report errors and then applying for credit and using it wisely.
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- myFICO. "What is a FICO® Score?"
- Equifax. "Why Your Credit Scores May Drop After Paying Off Debt."
- TransUnion. 2022. "Hard vs Soft Inquiries: Different Credit Checks."
- myFICO. "Credit Checks: What are credit inquiries and how do they affect your FICO® Score?"
- myFICO. "What Does Credit Mix Mean?"
- myFICO. "Credit Scores: How Low Can You Go?"
- myFICO. "What's in my FICO® Scores?"
- Credit Union of Southern California. "Does Paying Off Your Car Loan Early Hurt Your Credit Score?"