10 Reasons Your Credit Score Is Lower Than Expected

You already know late payments affect your credit score. But your payment history only accounts for 35% of your FICO score -- which leaves room for other factors to sneak in and pull your score down. Those other factors can be anything that affects the amounts you owe, the length of your credit history, the age of your active accounts, and the type of credit you have.

Here are 10 examples. Each one, or several of them, could be the reason your credit score falls short of your expectations.

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Paying your bills on time is admirable. Unfortunately, when it comes to credit score, on-time payments won't make up for having a short history with credit cards and loans.

The length of your credit history accounts for 15% of your credit score. Your FICO score considers the average age of your accounts as well as the ages of your oldest and newest accounts. If you only started using credit a few months ago, your score will reflect that -- even if you've never missed a payment.

The remedy here is simple. Sit tight and wait. Your score will tick up as you build your history of on-time debt repayments.

ALSO READ: How Much Credit History Do I Really Need?

Maxing out your credit cards will drag down your credit score, even if you are making the payments on time.

In FICO-speak, the amount of credit you use versus the total credit limit you have is called your credit utilization rate. Say you have one credit card with a limit of $4,000. If your outstanding balance is $1,000, your utilization rate is 25%. If you increase your balance to $2,000, your utilization rate doubles to 50%. The higher that rate gets, the more negative pressure it can put on your credit score.

Aim to keep your utilization rate at least below 30% or, preferably, below 10%.

Closing out old credit cards also puts downward pressure on your credit score. There are two factors in play here. Age is the first. If the cards you close are among your oldest, shutting them down would lower the average age of your accounts. It might also lower the age of your oldest account.

Credit utilization is the second factor. When you close old accounts, those credit limits are removed from your total available credit. That immediately raises your utilization rate, which has a negative impact on your score.

If you are servicing your accounts on time, the impact of closing old accounts shouldn't be drastic or permanent. You can offset some of the change quickly, though, by getting credit line increases from your existing accounts.

There are two main types of debt: revolving debt and installment loans. Credit cards and lines of credit provide revolving debt. Those accounts give you the flexibility to charge and pay down balances within account limits. Installment loans have a more rigid structure, with a fixed balance that you pay down over time. Examples are mortgages, student loans, car loans, and personal loans.

The FICO scoring formula rewards borrowers who can responsibly manage revolving debt and installment loans. The composition of your debt across those two debt types is called your "credit mix" and it accounts for 10% of your score. If you only have credit card debt and no installment loans, your score might be lower than you'd expect. The same is true if you have a car loan with no other debt.

ALSO READ: 4 Factors That Affect Your Personal Loan Interest Rate

Refinancing your home and acting on balance transfer offers may have the unintended consequence of lowering your credit score. Any time you apply for new credit, the lender researches your credit file. This appears in your history as a "hard inquiry." A hard inquiry here and there usually doesn't have a big impact. But a flurry of hard inquiries in a short time could lower your score.

Swapping out old accounts for new ones also lowers the age of your accounts, which could reduce your score even more.

If you don't take on more debt or start missing payments, these changes to your score should be temporary.

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Your credit history includes your own debt plus any debt you've cosigned. If a cosigned loan falls into past due status, it does affect your credit score.

This is one of the more challenging credit score obstacles to fix, because it usually involves a family member. For example, you might have cosigned on a student loan to fund your daughter's graduate degree. Unfortunately, as cosigner, you are legally responsible for repaying the debt if the borrower doesn't. You may have to do that to prevent further damage to your credit score.

It's best to strategize with the borrower quickly when a loan you've cosigned goes south. A change to your credit score isn't the only problem you'll face. Lenders can pull out all the stops to force cosigners to pay up. That includes wage garnishments and a lawsuit.

In 2020, consumers reported 2.1 million cases of fraud to the Federal Trade Commission (FTC), along with $3.3 billion in associated losses. Identity theft is real, and it can be very damaging to your credit score.

If you see a big change in your score or you are suddenly getting rejected for credit, visit AnnualCreditReport.com to get free copies of your credit files. You'll want to see your reports from all three credit bureaus: Experian, Equifax, and TransUnion. If any of them list accounts or names you don't recognize, visit IdentityTheft.gov to report the issue and get a recovery plan.

ALSO READ: Why the Pandemic Means You Should Check Your Credit More Often

Your rent, utility bills, or medical expenses can all appear on your credit report if you don't pay them. This typically happens when your account is sent to a debt collector, after being past due for 60 days or more. For medical bills only, the three credit bureaus enforce an extended grace period of 180 days.

These past due accounts will show up on your credit file as charge-offs and/or accounts in collections. Valid charge-offs and accounts in collection stay on your credit history for seven years, even if you've settled the debt. Once you pay the amount owed, the account status changes to "paid," which is slightly more positive than an open account in collections.

Settling an account for something less than the original amount does lower your credit score. This is true even if you were never past due on the account prior to the settlement. It doesn't matter, either, that the lender agreed to the lower payoff amount.

What matters from a credit score perspective is that you closed the account without paying the balance in full. The account status on your credit report will be "settled," which is scored differently than "paid in full" or "paid as agreed."

Settled accounts remain in your credit file for seven years. The timeline starts when the account is first past due or on the settlement date, whichever happened first.

You've been paying your bills on time for decades, you have gobs of available credit, and you've proven responsible with revolving debt and installment loans. If you've done everything right and your score still seems low, check your credit report for mistakes.

Incorrect balances and inaccurate account statuses happen, and these do affect your credit score. You might even see someone else's accounts on your report. This can happen without identity theft if the actual borrower's name or address is similar to yours.

All three credit bureaus have online dispute centers. If you see mistakes in your credit file, log a dispute with the appropriate bureau to get the information corrected.

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Credit scores have several moving parts, and your payment history is just one of them. You can't control every detail or eliminate fluctuations in your score. But you can learn to manage the big things -- keep your balances low, pay your bills on time, and leave your old accounts open even after you cut up the cards.

Master those skills and you will have an impressive credit score over time. You'll also move closer to financial independence in the process.

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