Considering how much of your financial future rides on your credit score, it can be quite frustrating – if not infuriating – to spend years making responsible decisions, only to find out your score still isn’t where you want it to be.
But many Americans’ struggle with credit scores has to do with a poor understanding of how the score is calculated; the Fair Isaac Company (FICO) uses many surprising metrics to calculate your score, which falls somewhere between 300 and 850.
Here are (more than) five reasons your score may not be as good as you think:
1) YOU HAVEN’T USED ENOUGH CREDIT OVER TIME
Approximately 35 percent of your credit score is made up of payment history. But this doesn’t just mean avoiding late payments; just as important is a long track record of on-time payments from a variety of accounts.
You could be the most responsible, wealthiest person in the country; but if you have paid cash for items your whole life instead of taking out loans and credit cards, your credit may be terrible.
That’s because the credit bureaus would not have much of a credit history to judge you on. And a credit score is the way strangers judge your estimated likelihood of paying back a loan.
“It’s not a fair system,” said Laurie Zoock of Credit Education Consultants. “It’s based on a computer system. It’s not like an interview where you’re looking over documents.”
So the longer your track record of paying off student loans, car loans, home loans and credit cards, the safer the bet you’ll appear to be to pay off your next loan.
2) YOU HAVE TOO MANY NEW ACCOUNTS
There is a delicate balance between building good credit and the penalties that come from having too many new accounts. That’s because approximately 15 percent of your score is based on the average age of your credit lines.
So when you open up a new line of credit – or close an old credit card – it will bring down the average age of your accounts, suggesting to the credit bureau’s algorithms that you do not have as long of a track record as other consumers.
However, over time new accounts grow old and this metric can ultimately help your score once again, as long as they are positively-reporting accounts.
Also know that approximately 10 percent of your FICO score is based on your recent history of new credit lines and account inquiries. So try not to apply for new credit – or even shop for home or auto loan rates – within six months of a big purchase if you can help it.
3) YOU’RE USING TOO MUCH OF YOUR AVAILABLE CREDIT
Approximately 30 percent of your score is determined by the ratio of debt to available credit. So never letting your credit card balances go over 10 percent or 20 percent of the credit limit will pay big dividends.
Having access to – but not using – lots of available credit can suggest restraint and responsibility to the credit bureaus.
To boost this metric, try raising your credit limits periodically; pay off your credit cards every month and use as little of your available credit as possible.
4) YOU MADE ONE LITTLE MISTAKE
The credit bureaus’ computers have little sympathy for your one little mistake. In fact, there may be nothing that hurts a good credit score worse than missing a single credit card or loan payment by 30 days.
According to FICO, a single 30-day delinquency can drop a credit score by 30 to 100 points. And a collection that goes to a debt settlement can cost you up to 200 points.
CreditCards.com estimates one 30-day late payment could make the difference of at least three to five percentage points on an auto loan, costing you $26 to $41 – or more – per month on that loan. And a home mortgage could be triple or quadruple that.
“That could (mean) hundreds of thousands of dollars over a 30-year loan,” Zoock said.
One piece of advice if you do make that mistake is to try and negotiate with the creditor or collection agency to get them to agree – in writing – that they will remove the negative report from all credit reports in exchange for your payment.
5) THAT SCORE YOU JUST GOT ONLINE ISN’T ACCURATE
When you go to apply for a new credit card, auto loan, or home mortgage, lenders will likely look at one of your FICO scores. However, when you get scores online, they’re typically estimates – and they can miss the mark by quite a bit.
“That’s because those companies are not using FICO; they’re using their own systems,” Zoock said.
If you need to know your exact scores, you can pay for them from each of the three main credit bureaus (Experian, Equifax, TransUnion) or MyFICO.com. Some lenders also offer sneak peeks into FICO scores, but not even those free scores are exactly what you’ll ultimately be judged by.