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When it comes to your true financial health, it’s vital to understand that it’s not all about how much money you have on you at any one moment. It’s also about how much capital you are able to access, such as by taking out a loan. In many cases, your ability to access capital is largely going to be determined by your credit rating. Your credit rating is an objective analysis of how trustworthy lending institutions consider you to be when it comes to your credit agreements and financial obligations. You might be thinking “but if I have a low credit score, why is that the case? Here, we’re going to look at a few common reasons.

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You’re in debt

One of the simplest explanations is that you’re in debt and owe people money that you shouldn’t, by rights, owe. This is not quite the same as having taken out a loan and being in the process of paying it back, nor is it the same as having an open credit card. This is more like being late with your debt repayments or owing fees that you should have paid a long time ago or having invoices that you are late in paying back. Take the time to implement a debt reduction strategy and your credit score will start to heal, too.

You have defaulted on past payments

If you have been unable to pay off your loans in the past, then it may get to the point where you default with the creditor. Defaulting on your loans is, broadly speaking, one of the worst things you can do to your credit score. When your creditor gives up on getting any money from you and you have chosen or been unable to pay back any money, it can take a long time for your credit score to recover from that. This is much the same as when you have your credit card charged off, meaning that the insurer has given up on you, but in this case, you may still be responsible for your debt.

You pay your bills late

It’s not just your loans and credit cards that affect your credit rating. Your financial obligations of all sizes can impact it. This includes, for instance, any bills you are responsible for. Utility bills, phone bills, subscription services, and so on. If you are late in paying them or you make automatic payments and they bounce back because you don’t have enough money in your account, that will knock your credit rating down. Paying them off as soon as possible is a good idea and can stop your credit from taking more damage. However, because you are late in the first place, you’re still going to need time for your score to recover as you have failed to meet your credit obligation. Using a bill reminder app can make sure that you know when payments are coming up, allowing you to prepare to pay them in advance.

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You’ve let a debt go too far

Defaulting on a loan or having an account charged off are two of the worst things that any lending institution can see on a credit report. However, there are other outcomes that are almost as, if not just as, bad as those when it comes to your debts. The first is having an account sent to a collections agency, as the creditor hasn’t been able to get the money they need from you. Paying the collections agency can help stop the ongoing damage to your credit rating, but it’s going to take some damage to recover the decrease in the score. Getting a judgement, i.e. being taken to court by your creditors, is much the same. In either case, not paying is always worse for your credit than paying.

You’re using too much of your existing credit

You might be sticking to the letter of your existing credit agreements, but that doesn’t guarantee that credit reporting agencies are going to like precisely how you’re doing it. Your credit utilization rate matters, as well. This is, effectively, how much of your open credit agreements you are using. So, if you have an overdraft for £3000, and you currently have a balance of -£1,500, that’s a credit utilization rate of 50%. The good news is that a high credit utilization rate is easy to recover from. You don’t have to wait too long, you just have to lower that rate and your credit score will respond appropriately.

You have no credit history

If you have never taken out any loans before, never used credit cards, and not even had much in the way of long-standing bill payments or other credit agreements, then your score may still be quite low. A credit score can only be built by you making use of credit. To that end, you may want to look at things like short term loans for bad credit. These can help you get some access to capital for planned expenses but, more importantly, they give you the opportunity to prove that you are, indeed, able to handle credit agreements and pay them off without too much trouble.

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There are false records on your credit report

You may behave as correctly and appropriately as possible, yet still, find that your credit rating isn’t as high as it should be. Erroneous records on credit reports are not at all uncommon. Check your free annual credit report if you haven’t already and keep an eye out for any false records. It might be a debt that you have paid off that is marked as not being paid off, or someone else’s debt being misattributed to you. You may have to chase these false records down to the source, but it’s worth it to boost your credit score once they’re corrected.

Credit is multi-faceted, so the reason may be more than one reason, but a combination of factors named above. The solutions are there, however, so get working on them.

Chiino
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