Why is my Credit Score Low if I Have No Debt?

Jan 10, 2017 | Be First to Comment!

It was about a year after getting my first credit card. After using the card to make small, necessary purchases (like gas and groceries), I had dutifully paid off my balances before my bill was due each month. I never carried a balance -- and I’d never had a cent worth of debt to my name. I was proud to build my credit and establish myself as a financially responsible, creditworthy adult, and fully expected it to reflect in my credit score.

But when I saw my credit score for the first time, I was disappointed. It was lower than I thought it would be. Why was my credit score low if I had no debt?

The most obvious answer was that my credit history was just not long enough. I’d only had credit to my name for about a year. (And in fact, even today, at least five years after getting my first credit card, the number-one drag on my score remains my credit’s age.)

This wasn’t, however, the only reason my score ended up being much lower than I expected. I later learned that even though I could afford to spend what I charged to my card, even though I budgeted for the bill and paid off my balance each month, I was using too much credit.

The Importance of Keeping a Low Credit Utilization Ratio

The credit limit on that single line of credit in my name was just $300. I regularly put more than $200 worth of charges on the card each month between gas, groceries, and personal items like toothpaste. This caused my credit utilization ratio to skyrocket well over the recommended 30%, which kept my score low.

As soon as I realized this, I applied for a second credit card, which increased my overall available credit. I kept my spending at the same level, so my credit utilization actually went down.

When I increased my available credit but kept my use the same, my score increased. It’s been in the excellent range ever since -- but it would have stayed low had I not investigated why my credit score was low even without debt.

Why “No Debt” Doesn’t Automatically Equal a Good Credit Score

This makes more sense if you understand what goes into determining your credit score. FICO scores are the scores 90% of lenders use when checking credit, so these are the most important to understand.

There are five factors that help FICO calculate a specific credit score for you:

FICO Credit Score Factors and Their Percentages

FICO credit score factors Percentage weight on credit score: What it means:
Payment history 35% Your track record when it comes to making (at least) the minimum payment by the due date.
Amounts owed 30% How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.
Length of credit history 15% The average age of your active credit lines. Longer histories tend to show responsibility with credit.
Credit mix 10% The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)
New credit 10% The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily.

Your actions and activity in these specific areas influence where your credit score falls on the scale, which ranges from 300 to 850. Anything below 560 is considered very bad credit, and you likely won’t qualify for many lines of credit or loans.

If your score exists in the 560 to 650 range, you have low or poor credit. In this range, you may still struggle to get approved for new credit. Once you get into the 650 to 700 range, which is considered fair or average, you’ll have more luck. Good credit is 700 to 750, and excellent is anything over 750.

With good or excellent credit, you can qualify for most kinds of credit and get access to the best available interest rates. 850 is the absolute perfect credit score (though few people ever reach this level, so don’t feel bad if you’re not there).

You don’t need the world’s best credit score to apply and get approved for the credit you want at a good interest rate. But a low credit score could hurt you. It could prevent you from accessing certain credit cards or loans, and when you can get approval, you’ll pay more for that credit or borrowed money thanks to higher interest rates.

Let’s take a closer look at what causes low credit scores -- even if you have no debt.

The Biggest Reasons Your Credit Score Isn’t Higher

Debt can lead to a low credit score, but it’s not just the debt itself that causes the lower score. Remember, your credit score is determined by those five factors listed above.

Poor credit happens when you:

  • Make late payments
  • Miss payments
  • Default on loans
  • Have accounts sent to collections
  • Hold large balances on your accounts
  • Open multiple new lines of credit in a short amount of time
  • Declare bankruptcy

These actions are also consistent with having (a lot of) debt, which is why it’s easy to make the correlation that debt causes low scores. But you can still find yourself taking actions that drop your credit score without racking up debt at the same time.

Your credit score may be low -- even if you don’t have debt -- if you:

  • Frequently open or close accounts and lines of credit
  • Generate lots of hard inquiries on your credit (which is easy to do, if you’re not careful when you shop around for a loan and want to see what lender will give you the best interest rate)
  • Often forget to pay your bills on time
  • Charge right up to the limit on your credit before paying off the balance (which causes issues for your score, even if you don’t let that balance become debt)

Payment history makes up 35% of your credit score, so regularly failing to pay on time can cause it to drop even if that’s the only mistake you make.

FICO and credit reporting agencies don’t detail exactly why your score is low. What they can tell you is why it isn’t higher. So if you want to find out what is holding your score down, check out the reason codes on your credit report or score.

Reason codes say things like, “18: Total of balances on accounts never late is too high compared to loan amounts.” If you go to ReasonCode.org, you can look up the specific code listed on your paperwork. The site will show you what it means and what to do to resolve the issue so you can work to raise your score.

How Errors Could Drive Your Credit Score Down

When you pull your credit report or review your credit score, take note if you find information you don’t agree with or incorrect terms. Maybe a reason code doesn’t make sense to you because it doesn’t apply to your financial situation. Or you could even find evidence of accounts on your report that you didn’t open.

That sounds a little weird -- but mistakes happen, and they often find their way into your file. In this case, you need to contact the credit bureau who issued the report and file a dispute.

Depending on the error, you may also want to follow up with your other financial institutions (like your bank and anywhere you have a financial account) and check for fraud. Accounts that you didn’t open but show up on your credit report could be evidence that someone is using your information to commit credit fraud or identity theft.

Needless to say, checking your own information on a regular basis is important. Not only can you catch fraud if it happens, but you can also spot errors that might unfairly drive down your score.

You can get a copy of your credit report every year for free. If you request copies more than once per year, you’ll pay up to $12 for each additional report. Again, if you find mistakes, open a claim or dispute with the credit bureaus.

How to Quickly Improve Your Credit Score

If you find your credit score is low even though you don’t have debt, you can take a few actions to improve it as quickly as possible.

First, make sure you’re current on all payments. If you missed some, pay them right now. Then, set up automatic payments, so you don’t miss them in the future. You can also set alerts on your calendar or phone to ensure you don’t forget again.

Next, reduce the amount of credit you use. You want to try and keep your credit use to 30% or less of your overall credit limit. If you have three cards, each with $1,000 limits, your total available credit is $3,000 -- and you’ll only want to charge up to $900 at a time to keep the utilization ratio low.

Then, hit pause on generating hard inquiries on your credit. Each hard inquiry causes your score to drop by about five points. Don’t seek out new credit or loans right now, until you give your score a chance to rise.

Finally, don’t forget to check your credit report for errors. And if you find one, take action. You can start the process of removing the error by contacting the credit bureau that issued the report -- either Experian, Equifax, or Transunion.

Your score won’t rise within a day or two. But you can see improvement in a few months if you consistently make payments on time, limit how much credit you use, and carefully manage the accounts you open and close.

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