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Is Your Credit Score Worse Than You Think?

Bad credit suprise - a low credit score.

Myth: "I've got excellent credit because I pay all my debts on time."

Truth: Paying your debts on time is extremely important, however, there are many other factors that can drastically lower your credit score. While it's impossible to have a good credit score without paying debts on time, the credit industry's computerized credit score model is programmed to look at a lot more factors in determining credit scores. A perfect payment history won’t keep your credit rating above water if you take your credit to extremes—like maintaining high credit balances.

There are many factors that can negatively impact your credit rating. Here are a few that often catch people by surprise:

  • High credit card balances
    How high are your credit balances? Maintaining high credit balances may be interpreted by the credit scoring system as a sign of financial difficulty and reduce your credit score even though your payment history is spotless. Using more than 50% of your credit limit on any credit card or line of credit can be seen as a sign of potential financial stress. Using more than 75% of your credit limit is really seen as the danger zone and can easily be interpreted as a real sign of financial difficulties. So do your credit score a favor and pay your credit card balances down to under 50% of your credit limit, and do yourself a favor by paying off your debts entirely so that you don't have to carry a balance each month. If you need some help getting out of debt, check out 12 ways here.
  • Frequently applying for credit
    How many times have you applied for new credit in the past few years? A lot of new credit applications can reduce your credit rating. Try not to apply for credit more than 3 times a year, and you'll avoid this pitfall. From a creditor's point of view, frequently applying for credit can be interpreted as a sign of financial stress which can reduce your credit score - meaning you're seen as a higher risk.
  • Old, unpaid parking tickets
    Do you have any outstanding parking tickets? If you have tried to forget about some old parking tickets, they may not have forgotten about you. Outstanding collections can appear on your credit report and negatively impact your credit rating. However, if you pay these off, you can often get them removed from your credit score at the same time. Check out our blog post about this to learn more.

To learn more about how your credit score is calculated, check out this article. You can also take a look at the steps necessary to achieve an a great credit score.

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