There’s no tried-and-true scientific method to determine your credit score based on the information in your credit file, but there are several things that universally have a negative impact on your credit score. Any one of these items could cost you in terms of higher interest rates, greater fees, or declined credit applications. If you have several problems and don’t know where to begin, consider these three items first:
1. Charge-offs
While at first glance charge-offs may look like you no longer owe creditor, in reality the creditor has deemed your debt to be a “lost cause” and has written off the debt or sold it to a debt collector. Typically, this only happens after several missed payments — anywhere from 3 to 6 months of nonpayment could land you with charge-off on your credit report.
Charge-offs are particularly damaging because they indicate that you are either unable or unwilling to pay off a debt, and are unwilling to work with creditors to find suitable payment arrangements. If your debt is sold to a debt collector, they too may place a negative item on your credit report, resulting in two negatives for one unpaid bill.
2. Maxed Out Credit Limits
Even if you pay your bills on time and avoid charge-offs and debt collectors, maxing out your credit cards will make it difficult for you to obtain new credit in the future. Having a high debt-to-available-credit ratio can take several points off of your credit score. Additionally, many lenders hesitate to extend credit to someone who is already maxed out, even if you are current with all of your bills.
If your cards are at their limit or close to it, work on paying down the balance. You should carry a balance of less than 30% of your credit limit from month to month in order to keep your credit scores healthy.
3. Lack of Credit or “Thin” Credit
If you’ve closed your old, unused credit card accounts, you may find it more difficult to open new accounts in the future. Likewise, if you’ve never had credit, expect to have less favorable financing terms than someone who has already established his or her credit. Because credit scores rank you on your credit history, having little or no credit accounts can mean that you will get turned down for many forms of credit because you don’t have a payment history that creditors can use to gauge your risk.
If you need to establish or reestablish your credit, a secured credit card may be one way for you to build a positive payment history while still taking advantage of favorable credit terms. Keep in mind that student loan repayment can also count, so if you have student loans, paying them off can contribute to establishing a positive payment history as well.
There are no easy answers when it comes to obtaining the best credit score possible. If you are having problems with negative credit and low credit scores and you can’t resolve the issue on your own, the next step may be to seek help from a professional credit repair company. A reputable credit repair service can help you to evaluate remove listings on your credit report. Negative items that aren’t accurate can be disputed, which will significantly raise your credit scores if you are able to have them removed.