5 reasons your credit could be terrible, even if you think it's not

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5 reasons your credit could be terrible, even if you think it's not

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  • Your credit score may slowly be getting worse over time without you realizing it.
  • Maxing out your credit cards can hurt your credit score, even if you pay your bills on time each month.
  • Things beyond your control, such as a change in loan servicing, can also hurt your credit score.
  • Here are five ways to know if you have a bad credit score, even if you think you have good credit.

In the US, credit is scored through a point system based on your payment history, outstanding balances, length of credit history, and types of credit accounts.

Credit scores range from 300 to 850, with a good credit score falling anywhere above 670, according to credit bureau Experian. A low credit score could impact your ability to get a mortgage or rent an apartment and could mean you have to pay a higher interest rate if you take out a loan.

There are some simple ways to build credit and gain a good score, like making consistent, on-time credit card payments. But there are certain things beyond your control that could also be hurting your score - and you may not even know it.

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According to Matthew Cooper, co-founder and CEO of the payment app Earnup, the way credit scores are calculated in the US is "incredibly unfair to your average consumer," not only because the formula for calculating credit scores is complicated, but it also keeps changing.

Here, Cooper highlighted a few ways you might have hurt your credit without realizing it, so you can take steps to improve your score.

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1. You've made late payments

1. You've made late payments

"Paying bills after the due date is the number one reason people have bad credit scores," Cooper told Business Insider. If you pay your bill more than 30 days late, you are likely to be reported to the credit bureaus, according to Cooper.

However, there may be a way for you to delay or skip a payment without damaging your credit. "Contact your biller if you're going to pay late and see what your options are," Cooper said. "There is very often a solution, especially in personal lending and student loans," he said.

You could also call a credit counseling service for advice on how to handle your situation

2. You make minimum payments on credit cards

2. You make minimum payments on credit cards

"Even if you pay on time, if you run high balances and only make minimum payments you can lower your credit score," Cooper said.

If you're charging up your credit cards but not paying down the balance, you might have exceeded the optimal debt-to-available-credit ratio without knowing it. Your credit score can suffer if you have used more than 30% of your available credit. The ratio is calculated on your total credit and debt, not on each card.

To keep your credit score within a good range, keep an eye on this ratio and calibrate your monthly payments to keep your balances low. If that's not possible, you could open another credit card to extend the amount of credit available to you, thus reducing your ratio.

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3. Your loan has been sold, and you don't know it

3. Your loan has been sold, and you don't know it

"One of the reasons that people have bad credit and don't know it is because their loan was sold or transferred to a different financial institution," Cooper said. This is a particular issue for mortgages, because your mortgage may be sold several times during the life of the loan, according to Findlaw.

If your mortgage servicer, which is the bank or processor to whom you send your mortgage payments, changes (which often happens when a loan is sold), it can cause problems.

You may think you're making your mortgage payments on time, but if your payment is going to a different place, you could end up falling behind. Cooper noted that this is a particular problem for people who set up automatic payments, because they might not open pro forma mailings from their servicers.

Mortgage servicers are required to notify you of any changes. To avoid this credit score pitfall, make sure your mortgage servicer has your current address, email, and phone number. And open everything you get from your servicer, even if it looks like junk mail.

4. You've had a lot of credit checks

4. You've had a lot of credit checks

Your credit "can be significantly impacted by the number of inquiries," Cooper said. According to Credit Karma, there are two types of credit inquiries: hard and soft.

When you check your own credit score, it's a “soft inquiry” that won't affect your credit. When you apply for a loan or a new credit card, the lender will do a “hard inquiry,” or “hard pull,” of your credit history to inform its lending decision. Too many hard inquiries in a short time period will drag down your score, according to NerdWallet.

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5. You closed an old credit account

5. You closed an old credit account

When you open a new credit account or close an older one, it can cause your credit score to dip, even if you've never had a late payment or you're not using the old card. Credit bureaus look at the average length of your credit history on all your accounts; the longer the better. “If you’re getting new accounts,” Cooper said, “try to stagger those over time.”

He added, "If you're planning on applying for a home loan or other major credit event," Cooper said, " avoid closing your oldest credit lines; that may lower your credit."

To find out more about the factors that could affect your credit score and how you might improve it, try a credit score simulator, which calculates how your credit score may change based on the financial decisions you plan to make.

You should also check your credit score at least once a year, though Cooper suggested doing it every quarter, if you can. Many credit card companies give you access to your credit score, as well as sites like Credit Karma and Credit Sesame. You can also get one free credit report from each credit bureau every year.

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