It’s one thing to know that you have a low credit score. It’s another thing entirely to know why this is the case. When you know why your score is low, it’s easier to formulate a plan for changing its course over the months to come.
Here are some of the most common reasons for a low credit score:
- Late payments: Did you know that your credit history accounts for 35 percent of your credit score? So, if you have late payments on your credit report, you can expect it to drag down your score. On the plus side, preventing this is simple. All you have to do is make sure you pay your bills on time.
- Collection accounts: It’s a big deal if an account is sent to collections. For instance, if you don’t pay a medical bill and it is sent to a collection agency, it’ll drag down your credit score. Rather than risk this, work with creditors if you can’t pay a balance in full.
- Filing for bankruptcy: Bankruptcy is a last resort. It doesn’t matter if you file for Chapter 7 or Chapter 13, it’ll impact your credit score for a minimum of seven years. That’s a long time when it comes to your finances.
- Foreclosure: Just the same as bankruptcy, you should never rush into foreclosure. There are other options available to you, such as a short sale or modifying your mortgage. Foreclosure sounds like the easy way out, but the long-term impact on your credit score is nothing to take lightly.
- Defaulting on a loan: If you take out a loan, you should do whatever it takes to pay it back based on the terms and conditions. Should you run into trouble, contact the lender to learn more about your options. They would much rather work something out with you than get nothing at all in return.
As you can see, there is no shortage of reasons for a low credit score. Even if you only fall prey to one of these, it’ll impact your score. And when that happens, it’s more difficult to secure a loan, open new accounts, and obtain competitive interest rates when borrowing.
If your credit score is low, don’t wait to take a deep dive into your credit report. Doing so will help you identify the culprit, thus allowing you to take the appropriate action.