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Contrary to what you might think, “debt” isn’t the only factor that lowers a credit score. While debt is certainly an important part of your score, you can be debt free with an excellent payment history, while having a less than satisfactory credit score.
So why is your credit score poor when you have no debt? Let’s look at five reasons why your score might be lower than you expected.
1. Your oldest credit card is still too young
Credit bureaus favor borrowers who have a long credit history. In fact, “credit histories,” or the average age of your active lines of credit, make up 15% of your credit score. If your oldest account is young enough, your score might reflect that.
If so, only time will help your score. Keep your oldest credit card open, even if the card is no longer your preferred payment method. And beware of opening too many credit cards in a short time, as you could dilute the “average age” of your accounts.
2. You are using too much credit
Even if you’re not in debt, you could hurt your credit score by overcharging your credit limits.
The credit bureaus dedicate a large portion of your score to use of credit. Basically, credit usage measures how much credit you are using compared to the total amount of credit you have on your entire account. If you have three credit cards, for example, each with a credit limit of $5,000, your total credit would be $15,000. In this case, max out just one credit card and you’ll use over 33% of your credit.
In general, it’s best to keep your credit utilization below 30%. If your credit score is poor, however, I would recommend using a maximum of 10%. The less credit you use, the less risky you appear to the credit bureaus, which boosts your credit score.
3. Your credit has been checked too many times
Each time you apply for a new credit card, the card provider will do a thorough investigation of your credit score. These “hard draws” represent 10% of your score. If you have too many inquiries in a short time, you could drop your score by a few points.
But it’s not just credit card providers who are making tough demands. Any lender can do this, including loan companies and mortgage providers. Even some landlords might do a hard credit check, although most will probably just make a simple request.
4. You only have one type of credit
Another common culprit, credit diversity can often turn a great credit score into a poor one.
Credit diversity shows lenders how many different types of credit you have. Credit cards are one type of credit, but also personal loans, lines of credit and mortgages. If you have five credit cards, you could have a huge amount of credit. But if you only have five credit cards, you still only have one type of debt, which could reflect your poor credit score.
5. Your credit report has an error
If none of the above resonates with you, if you’re sure you’re doing everything to raise your score, you might have an error on your credit report.
The most pernicious error is identity theft. Simply put, someone is irresponsibly borrowing money on your behalf. Alternatively, someone could have the same name as you, in which case your credit activities and theirs have become mixed (trust me, it happens).
Either way, if you suspect something more sinister, get a copy of your credit report and then contact your credit card provider if there’s an error.