Your credit score is one of the most important numbers in your financial life. Having a bad credit make a mess of your personal finances.
With a low credit score, it may be difficult to obtain a mortgage, qualify for a auto loan, or even to apply for certain jobs. Plus, the lower your credit score is the more money you can expect to pay in interest when you do qualify for a loan.
There are a number of different things that affect your credit score. This includes things like the amount of debt you’re currently carrying, how often you make late payments, and your overall credit history as it is reflected in your credit report.
There’s a lot you can do to damage your credit score, but fortunately, this means that if your score is lower than you would like, there are many ways you can improve it.
On this page:
- What is the Lowest Possible Credit Score?
- What Affects Credit Score?
- How Can I Improve My Credit Score?
What is the Lowest Possible Credit Score?
Your FICO score, or Fair Isaac Corporation, is a score used by lenders and creditors. It uses the three major credit card bureaus to gather your score. The three major credit bureaus are Equifax, Experian, and TransUnion. You can obtain one free credit report from each of these bureaus each year.
The FICO score ranges from 300 to 850, with 850 being considered excellent credit. It’s a number that isn’t easy for most people to reach. In fact, less than one percent of the population has a perfect credit score of 850.
In theory, 300 is the lowest possible credit score you can have – though most Americans won’t reach this point either. To have a score that low, you would have to make every bad financial decision possible.
The average credit score in America is 671 to 695, which is considered a decent score. But 12 percent of Americans do have a credit score that is under 550, which is considered fairly poor.
What Variables Affect Your Credit Score?
Your FICO credit score is not just a random number that you have little hope of changing. It’s based on five different scoring variables. Here is a breakdown of the five main credit scoring factors:
1. Your payment history
Your payment history is one of the most important factors that determine your credit score. This includes revolving debt like credit cards or installment loans like your mortgage or auto loan payments.
Your score is largely impacted by the frequency and amount of any missed payments. So if you want to improve your credit score, the best thing to do is start paying your loans on time immediately.
2. Credit utilization
Your credit utilization is the percentage of available credit that’s being used. So routinely maxing out credit cards is going to hurt your credit score.
Individuals with the highest scores tend to have a credit utilization rate of six percent. They also carry a balance that is less than $3,000 on all revolving accounts.
As a general rule of thumb, try keeping your utilization under 30 percent to ensure that your credit score doesn’t take a hit for using too much of it.
3. The average age of your accounts
Your credit score will largely be based on the length of your credit history. That’s because a lengthy credit history provides a better picture of your financial behavior.
That’s why it’s not recommended that you aggressively open and close multiple credit cards. It’s better to focus on maintaining long-term revolving accounts.
4. New credit
It’s never a good idea to open too many new accounts at once. This could indicate you’re having financial problems and could hurt your poor credit even more. Only open new accounts on an as-needed basis.
5. Variety of credit
This category is more nuanced, but essentially, borrowers want to see that you have a history of repaying different types of debt. So if you have a good mix of revolving debt and installment loans, this may help your credit score.
How Can I Improve My Credit Score?
So what do you do if your credit score falls in the low range? If you find yourself in this position, don’t despair. Improving your credit score will take time, but there are several things you can begin doing.
Pay Debt on Time
First of all, start paying all your debts on time and in full. If you habitually pay your bills late, then this will likely negatively affect your credit score.
There are many ways you can ensure you pay these debts on time. Setting up payment reminders or even automatic payments with your bank.
Reduce Your Utilization
If you’re able, paying a little extra can also help reduce your debt utilization more quickly. Start making additional payments on the credit card with the highest interest rate first.
If you find yourself routinely using your total available credit limit, consider cutting expenses and cautiously consider opening new lines of credit available to people with low credit scores, such as a secured credit card.
And if you’re trying to reestablish your credit history, opening a new account and making payments may repair a low credit score.
Your credit score can range anywhere between 300 and 850, but most people will fall somewhere in the middle. Making an effort to improve your score will be fundamentally important. If your life has been negatively impacted by a low credit score, know that there are ways to change it.
It won’t happen overnight, but with consistency, your score will continue to improve. And by following the recommendations in this article, you’ll begin developing the habits necessary to maintain a high score in the future.