Takeaways
- Credit scores determine your access to favorable credit products and terms.
- Credit scores between 300-600 are poor, and 600-700 are mediocre.
- Regularly monitoring your credit score and report can help boost your profile.
- Poor financial decisions and dings can stay on your credit report for up to 7 years.
- Factors like late payments, unemployment or low Income, and very high credit utilization can impact credit scores.
What Is a Credit Score?
A credit score is a number between 300 and 800 that shows lenders your propensity for repaying debt.[1] Your credit score is calculated based on the credit report each of the three credit bureaus creates, and a low credit score can increase your borrowing costs.
You can think of your credit score as a cheat sheet that lenders use to determine what credit products – credit cards, personal loans, auto loans, mortgages – you qualify for and what terms they should offer you. For any type of consumer debt, lenders want to know what you can and will make regular on-time payments, or at least the monthly minimum.
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Why a Credit Score Matters
Your credit score matters because it helps lenders determine what credit products and terms you should get. Consumers with high credit scores receive better credit terms than those with lower credit scores because lenders know these consumers are more likely to repay their loans with interest.
If you have a high credit score, you might be eligible for a lower annual percentage rate (APR), higher cash-back rewards, more travel points, longer grace periods, and access to credit cards with more overall benefits.
For major purchases like a house, car, or boat, where the term loan is many years, securing a lower interest rate can save you thousands of dollars in interest payments. Instead of paying interest, you could use that money to invest in stocks, bonds, and real estate to grow your net worth.
Another major advantage of high credit scores is the speed of approval. If you have a soft or hard inquiry on your credit, you might be automatically or seamlessly approved for new credit products like personal loans, giving you quick access to cash.
5 Reasons Your Credit Score Is Low
If you applied for a new credit card or product recently and received a rejection, low credit limit, or unfavorable terms, there can be many reasons this happened. Here are seven reasons you might have a low credit score that is affecting your ability to get the financing you want:
1. No Credit History
Not everyone automatically gets a credit score. Once you turn 18, you can start building your credit. You can build your credit score over time depending on the steps you take to establish your credit.
Initial credit scores usually range from 500 to 700. Once you start using credit, even gradually, you can steadily increase your initial credit score over time. The problem is that most people don’t even know where to start.
Here are three common ways to get a jump start on establishing your credit score without taking on too much risk:
- Become an Authorized User: You can be added to a family member's credit card or get your own credit card to start learning how to manage a revolving credit. Depending on your situation, getting added to your parent’s credit card can get you on solid footing if you manage your payment correctly.
- Get a Secured Credit Card: A secured credit card is a credit card that helps new credit card users or those looking to rebuild their credit with an opportunity to build credit with financial bumpers. Secured credit cards require a cash deposit that acts as your credit limit. This puts guardrails on your spending patterns.
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- Take Advantage of Reporting Rent: Credit cards are just one of the games in town. You can take advantage of regular payments, like your rent, that can be reported to the credit bureaus, too. This allows you to get credit for payments you would make anyway.
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2. Missed Payments
Depending on whether you are evaluating your FICO or VantageScore, your credit score is heavily weighted on your payment history. In fact, your FICO score allocates 35% of your score to your payment history. A series of missed payments can damage your score quickly.
Ensuring you get your monthly mortgage, credit card, or loan installment payments is critical to your financial health. Managing your debt payment takes having a well-thought-out budget process. You can use popular methods like the 50/30/20, Envelope, or Passion budget.
Plug and play with Smart Money's 50/30/20 Calculator to determine how much of your monthly take-home pay should be allocated to debt payments.
Here are three common ways to mitigate missed payments and your credit score without taking on too much risk:
- Automate Your Finances: Almost any line of credit, installment loan, mortgage, or other credit product has online automatic payment features. Alternatively, you can automate your finances by scheduling regular payments to these accounts from an online high-yield checking account.
- Create a Monthly Budget: Managing your debt payment requires a well-thought-out budget process. You can use popular methods like the 50/30/20, Envelope, or Passion budget. Plug and play with Smart Money’s 50/30/20 Calculator to determine how much monthly take-home pay should be allocated to debt payments.
- Save Cash: A proven method to avoid getting caught in a debt spiral is to make sure that you have enough cash in your savings or checking account to pay off your credit card. This strategy hedges against getting caught with too much debt and no cash to pay it off.
3. Low Income
Another major contributing factor to a low credit score is low income. A low income can decrease the credit limit that a bank or credit union is willing to issue you for a credit card or personal line of credit.
By limiting the amount of credit available to you, you might need help to utilize credit products that can enhance your credit report, such as taking out new forms of credit. For example, if you already have a credit card, you might have a debt-to-income ratio too high for borrowers to give you a personal loan or mortgage.
Here are three common ways to boost your income so that you are eligible for a more comprehensive array of credit products:
- Increase Your Salary: One of the fastest ways for most people to increase their income is to get a promotion or title increase at work. This may mean taking on increased responsibility and mapping out your career trajectory, but getting a promotion can increase your take-home pay quickly. More income means lenders will be willing to extend you more credit because you can now pay back more.
- Start a Business: One of the best ways to create long-term wealth can be to start your own online business. Whether you want to make your online blog, sell used products online, or monetize your art habit, building a business can increase your overall earnings. (Read more about creating a C Corporation, Limited Liability Company, or a Nonprofit.)
- Earn Side Hustle Money: Starting your own business and getting a raise can sometimes seem like more long-term financial goals. If you need cash quickly, you should investigate earning money with a side hustle. You can try these 12 ideas for making money in one hour or less.
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4. High Credit Utilization
No matter how much money you make, one of the variables that can drag down your credit score is high credit utilization. Credit utilization is the amount of your outstanding debt relative to your credit limit.
Banks and credit card companies want you to keep your credit utilization ratio below 30%, so you want to avoid incurring too much debt. Calculate your credit utilization with Smart Money's credit utilization calculator.
Your credit utilization is also correlated to your debt-to-income ratio. Check out Smart Money’s debt-to-income calculator.
If you have high credit utilization and a low income, you can compromise your ability to pay off debts, decreasing your credit score. Credit issuers will then increase the APR they charge for other credit products.
Here are three common ways to decrease your credit utilization and get better terms on credit products:
- Pay off Debt: One of the fastest ways to decrease your credit utilization is to decrease your outstanding debt. You can do this all at once or gradually over several weeks or months. Getting debt-free requires some financial planning and patience.
- Increase Your Credit Limit: Another alternative to decreasing your credit utilization is to increase your current credit limits. Increasing your credit limits on your credit products might involve updating your online credit profiles or submitting a request for an increased credit limit. Requesting a high limit is especially helpful if you recently got a raise or have a higher salary than when you applied for your credit card.
- Apply for More Credit: Increasing your available credit ultimately decreases your credit utilization. If you have been exploring different types of credit cards and choose one you think would be good for your personal situation, applying for a credit card can decrease your credit utilization because it expands your available credit.
5. No Credit Mix
A critical variable in all credit scores is your credit mix. As most people progress through life's significant milestones, they progressively use different types of credit products.
Many people take out their first credit card when they are eligible at 18 years old, use student loans for college or continued education, and apply for an auto loan to finance a new or used car purchase.
Here are three common ways to diversify your credit products to augment your credit score:
- Get Credit for Your Rent: Whether you are renting an apartment or house, many people need to realize you can get credit for renting your apartment on your credit report. Getting credit for your rental payments on your credit report can increase your credit mix quickly. (Read more about how much you should be spending on rent.)
- Buy Your First Home: Unless you are paying for your home with cash, most people are financing their first home. Getting a mortgage adds a new type of credit product to your credit mix. Most homeowners have a 30-year fixed-rate mortgage, which also helps with your payment history and length of credit.
- Apply for a Personal Loan: There are many reasons to apply for a personal loan outside of diversifying your credit mix. Personal loans are highly flexible credit products that let you use your loan or almost anything. Many homeowners use personal loans to renovate homes, but you can also use them to travel or take vacations.
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Where to Check Your Credit Report
Each year, you are entitled to get a free annual credit report from the three credit bureaus – Experian, Transunion, and Equifax. Getting a copy of these reports will give you exclusive access to what is in each credit report and highlight areas where you need to focus to improve your credit score.
For example, you might have missed minimum payments you forgot about or need to expand your credit mix to other areas outside your credit card, like an auto or personal loan. These free credit reports allow you to know what lenders analyze when they review your applications.
Smart Summary
Applying for a new credit product can be stressful. However, if you prepare in advance by regularly monitoring your credit report, you can boost your credit score quickly. Understanding why your credit score is low is critical to understanding how to fix the situation. If you are rejected for a credit product, you can always inquire about what factors influenced that decision. At the end of the day, your personal finances situation is in your hands. Read more below on how you can start improving it today.
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(1) FICO. FICO Score 10 T. Last Accessed January 14, 2025.
