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Top factors keeping your credit score low

Ever received a denial of credit letter with reason codes you did not understand? Those codes can answer why your credit scores are low.

Have you ever received a denial of credit letter with reason codes you did not quite understand? If so, you are not alone. FICO, the most widely used credit scoring formula, does not offer a comprehensive insight into exactly what affects your credit score.

You may have to decode the reason codes given by credit card issuers, banks and lenders when you get that dreaded denial letter. Reason codes are provided in a typical denial letter along with credit scores.

The top 5 reason codes are directly related to lower credit scores and have the most negative impact on a credit score.

1. Serious Delinquency. A “serious” delinquency refers to a recent late payment. A 30-day late payment is a serious delinquency but not as bad as a 60-day missed payment. A recent 60-day late payment or any payment 90 or more days past due will lower your credit score significantly.

According to FICO, a 60-day late payment is not as significant as a 90-day late payment. But how recent and frequent late or missed payments occur make a big difference. FICO says “A 60-day late payment made just a month ago will affect a score more than a 90-day late payment from five years ago.”

2. Serious Delinquency, Public Record or Collection Accounts. This reason code refers to a serious delinquency accompanied by a third-party collection agency debt or public record items, such bankruptcies, foreclosures, lawsuits, wage attachments, tax liens and judgments. Although these types of items on a credit report are considered very serious, the older an items gets the less it counts; and, if the item is for a small amount, it counts less.

3. Time since delinquency is too recent. The length of time since the most recent late payment or serious delinquency is a major factor. Consumers with good credit scores that experience just one late payment may see as many as 100 points being taken off their credit scores. But, as the late payment incident gets older, it matters less, especially if the consumer resumes paying on time. In a matter of months consumers can recover from late payments with on-time payments.

4. Number of accounts with delinquency. Multiple accounts with late payments of 30 days or more can weigh heavily on a credit score. If you have multiple account missed payments, get current and stay current. At this point unless your creditors are willing to remove the late payments or you get them removed through the dispute process, the only way to improve your score would be to pay all credit obligations on time consistently going forward.

5. Proportion of balances to credit limits on revolving accounts is too high. How much you owe on all your credit accounts makes up 30% of your FICO score. According to FICO having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower but when you are using most of your available credit it indicates overextension. Any time you appear to be overextended it is assumed some payments may be paid late or not at all. The likelihood of default is high.

Even if you use most of your available credit but pay in full each month, your credit score could be lower due to the total balance on your last statement. It is the balance generally shown your credit reports. If you want your credit reports to reflect the fact you pay in full each month, make the payment before the statement closes and do not use the credit card until after the balance reports to the credit bureaus.

For consumers looking to rebuild credit scores avoid the top five factors contributing to lower credit scores.


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