Alright. It’s time to stop sugar coating your credit score. For months, you have been trying to figure out why your score is in the 400-500 range. You ask yourself, “Is There Hope?” or “Can I at least get my score to 590 or 600. I am here to tell you YES! The only way to find the solution to a problem is to first admit that you have a problem and to point out what the problem is. Here are the 15 reasons why your credit score is still in the 400-500 range.
Top Reasons why Your Credit Score is Still in 400-500 Range
1. Too Many Collections On Your Report
One of the biggest mistakes you make is simply letting an account go into “Collection” status. This is when you originally owe a company money for something, and they try to get a hold of you by calling and such, but they are unsuccessful at doing so. At that point, they send your account and the balance due to a Collection Agency. This can decrease your score 15-45 points and sometimes more. This is the main reason you have a 400-500 credit score.
2. Too Many Late Payments
Payment History is the most important scoring factor in the algorithm for credit scoring. 35% of what makes your credit score comes from this alone! Because of this, credit reports show the last 48 payments to lenders to show whether you pay on-time, sometimes late, or always late. Most credit reports with multiple late payments are almost guaranteed to have a score in the low 500’s to mid 400’s. The only way to combat this is to make more on-time payments.
3. 80%-90% Of The Accounts On Your Credit Report Are Closed With Open Balances
This normally happens right before the account goes into collections. Whether you closed the account or not, most financial institutions will close the account for you due to non-payment of an open balance. This also creates another problem…….Shorter Credit Length History. This means that all of the positive and negative activity on this account will become a non-factor in 7 years from the last activity date. A short credit history is not a good sign for lenders as it doesn’t show that you can manage your credit over time.
4. Public Records
Public Records are the most devastating factors in a credit report. They can affect a credit score and report so much so that this information is open to the public for free… hence the name PUBLIC RECORD! These records consist of Civil Judgments, Child Support, Bankruptcy, & Tax Liens. This information is open to the public simply because most of it requires a legal or government response to complete. These can hurt your score and report for years and as much as 80-100 point decrease. The only way to combat this is to pay the amount due and see if they are willing to remove them from your credit report.
5. High Credit Utilization
One of the most common causes that your credit score is 400 or 500 is that your credit utilization is too high. This means that you’re using a large percentage of your available credit limit – usually more than 30%. This is seen by lenders as a sign of financial stress and excessive credit dependence. Keeping your balances low and paying off debt on a regular basis is one of the quickest ways to get your credit score back on track.
6. Too Many Hard Inquiries
Every time you apply for a credit card, loan, or financing, a hard inquiry is added to your report. Too many inquiries in a short period of time is an indication of risk to lenders. This will lower your credit score by 5-10 points for each inquiry. If your credit score is 400, it may be due to the number of credit products you have applied for, but did not spread them out. Limit new credit applications until you improve your score.
7. Charged-Off Accounts
A charged-off account occurs when a creditor throws in the towel and gives up on collecting your debt and charges it off as a loss. It stays on your credit report for up to seven years and will cause your score to drop significantly. If your credit score is 500, you may still be getting pulled under by charged-off accounts. For example, to minimize their effect, try negotiating a settlement or asking them for a pay-for-delete agreement.
8. Maxed-Out Credit Cards
Using your credit cards completely to their capacity is another very big red flag. Even if you have made minimum payments, maxed-out cards can make it seem that you’re financially overextended. High balances make a huge contribution to a poor credit score. In order to rebuild your credit, try to use less than 30% of your available credit.
9. Identity Theft or Fraudulent Accounts
Sometimes your credit score is 400 or 500, not because you are spending, but because of fraudulent activity. Identity theft can lead to unknown accounts, late payments, and types of debt that you did not incur on your report. Check your credit reports regularly and dispute anything you didn’t authorize immediately.
10. Defaulting on Student Loans
Federal and private student loan defaults are a major culprit in terms of having a low credit score. When loans go into default, they come to be known as delinquencies or charge-offs. This hurts your payment history – the biggest factor on your score. Contact your loan servicer about rehabilitation or consolidation programs to get your loans back into good shape.
11. Short Credit History
A ‘limited’ or ‘short’ credit history indicates that there isn’t enough information for lenders to measure your reliability. This is particularly common among people who are trying to rebuild their credit after going through bankruptcy or going without credit for a long period of time. If you have a credit score of 500, then increasing your credit history by not closing older accounts can help you improve your score over time.
12. Errors on Your Credit Report
Inaccurate information – such as payments that are listed as being late when they weren’t, or debts that are not yours – can have a drastic impact on your credit score. If your credit score is 400, check your credit report for all three bureaus (Experian, Equifax, and TransUnion) and make disputes for incorrect credit information.
13. Too Many New Accounts
Opening a number of new credit accounts in a short span of time makes lenders wary. It gives the impression that you desperately need credit or are taking on more than you can chew. Too many new accounts can momentarily cause a decrease in your score, especially if your credit score is 500 to begin with and your history isn’t very good.
14. High Installment Loan Amounts
While revolving credit (like credit cards) will impact your utilization, installment loans (like car loans or personal loans) will impact your overall debt ratio. If you are over 75% of your original loan balance, your score can suffer. Paying off time for these bills allows lenders to see that you are responsible, helping you to rebuild from a credit score of 400 or 500.
15. Lack of Active Credit Mix
Your credit score benefits from having a variety of different types of accounts, such as reference accounts, credit cards, installment loans, and retail accounts. Having just one type of account makes it harder to have a high score. If your credit score is 400, then diversify your credit mix responsibly after you’ve stabilized your existing accounts.
The Bottom Line
You should now be able to put together a plan to increase your score and get out of the 400-500 score bracket. Of course, some credit reports are different than others, but what remains a fact is that these four factors will decrease your score dramatically and more than likely give you a low credit score. For more topics like this or to learn how you can personally increase your credit score with a personalized Success Plan, please read below.
