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Credit Corrector: Why is my credit score so low?

Two Piggy Banks
Two Piggy Banks

If you wait until you need a loan to check your credit history or credit score, you’ve waited too long. The interest rate on your loan will likely be based on your credit score, even if that score is based on an error in your credit history or a lack of knowledge about building positive credit. (See: Why does my credit history matter)

You can check your credit for free, once per year, at www.annualcreditreport.com. This will give you information on your current and past credit accounts from the three major credit reporting bureaus. You may be surprised at what you find. There could be mistakes on your account, or someone could have opened credit in your name. If you see a mistake or instance of fraud, file a dispute with each of the three credit bureaus. This can be a lengthy process. Try to avoid applying for any credit until it is resolved.

Your credit score is based on the information in your credit report, but the score is not available for free. Each credit reporting bureau offers services that will let you pay to check your credit score. If you choose to do this, you will have a better idea of what type of loan rate you may receive. Plus a low credit score can tip you off to fraud or mistakes in your credit report, or the need to change the way you manage your finances.

A low credit score could be from late or skipped payments on a credit card or loan. If you have ever had a collection filed against you, that will also lower your credit score considerably. Other information that can affect your score is the length of your credit history and your ratio of credit available to credit used.

If you don’t have a long credit history, there is not enough information to determine your patterns as a borrower. Borrowers who have several years’ history of repaying loans and managing credit wisely typically have higher credit scores.

Your ratio of available credit to the amount you owe can also impact your score. For instance, even if you’re making regular monthly payments on a credit card, if you’re constantly charging up to your credit limit, that can lower your score.

While it may seem like a lot of work for a slightly lower interest rate on loans, improving your credit can really end up saving you a lot of money. For instance, on a 30-year fixed rate mortgage of $100,000 with a 4% interest rate, you will pay $71,868 in interest. At a 4.5% interest rate, you will pay $82,405 in interest. Qualifying for an interest rate just 0.50% lower can save you $10,537!

Next Week: Tips to raise your score

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