Credit scores are touchy little things – reacting negatively to events and situations that you think should be positive.
For instance, if you’ve paid cash for everything all your life, you probably feel pretty virtuous. But when it comes to credit scores, you’re sunk, because you don’t have any payment history for the credit bureaus to report.
The same effect results if you have credit cards “in case of emergency,” but never use them. No payment history equates to lower scores.
Or, you might have several credit cards, but use only one of them, so the other card issuers have closed your other accounts for non-use. This reduces the amount of credit available to you – and again, lowers your credit scores.
Consolidating all your balances on one low-interest card in order to pay off your debt sooner also has a negative effect. Even if you have 5 cards – each with a $10,000 credit limit – a balance over $5,000 on just one card will bring your credit scores down.
It makes sense to most of us to look at the total credit available and compare it to total use, and they do take that into consideration. But they also want to see less than 50% use on each individual card – with 30% being better.
If you’re working on credit repair…
If you’ve had credit problems and are working to repair them, you can also lower your scores by practicing good habits.
It seems that each of us is put into a “category with our peers” when it comes to credit scores. People with sparkling clean credit are in one category, those with a few late payments are in another, those with a bankruptcy are in another. And those are just a few of the categories – there are many.
While only those with a clean credit history can attain the highest scores, we’re all rated in comparison to others in our category. By the same system, one late payment can drop a 700 score by 100 points, but will barely affect a score of 580.
So paying off old debts, paying down credit card accounts, having collections come off the report due to age, and other activities that should raise scores can actually lower them.
That’s because those positive actions raise the consumer into the next higher category – where he or she is rated in comparison to others in the same category.
It’s kind of like kids in school. The 9th graders are top dogs in Junior High, but when they suddenly go off to High School, they’re once again at the bottom of the ladder.
This is certainly a setback for consumers who are struggling to raise their scores. But the good news is that with continued good habits, they’ll soon rise to the top of their current “category.”