Why is my credit score low?

Q: Why is my credit score so low? I have used my credit responsibly so why isn’t my FICO score higher?

credit scoring factorsAre you someone that always pays your bills on time? Do you have little to no debt? Are you responsible with your credit cards but still have a low to average credit score? Well, there are some common misconceptions about how to obtain a high score. Here are three possible answers to your why your credit score is lower than expected.

Charging more isn’t always better

Credit utilization is the percentage of your available credit that you use during a billing cycle. For example, if your credit card had a $5,000 credit limit and your billing cycle closed with a $1,000 balance, that would equal 20% credit utilization on that account.

One component of your FICO credit score is based on credit utilization. Because the FICO formula is proprietary and confidential, no one knows what the ideal credit utilization number or range is. But we do know is that using too much of the available limit on your credit cards is bad, but using too little won’t be helpful either.

The consensus among credit experts is that it’s best to use no more than 25 to 30% of your credit limit on a card at any given time. But if there are no charges (a 0% credit utilization) that could contribute to a low score because that would mean you’re not using the account.

Carrying a balance isn’t necessarily beneficial

Many people assume that in order to obtain a high credit score, they need to carry debt on their credit cards… nothing could be further from the truth.

Each month your credit card reports to the bureaus; the information reported includes things like your credit limit, your balance, if payments were made on time, etc. But your balance can change day by day, so which day do they base the information on? Well, it’s almost always based on the day your monthly statement closes.

So let’s say at the start of your monthly billing cycle the balance was $0. If you made a $1,000 in charges during that cycle, that $1,000 is almost always what’s being reported to the bureaus (assuming you didn’t make any payments before the cycle closed). Therefore you can go ahead and pay that balance in full after the billing statement is generated and that $1,000 should still show up on your credit report.

Having multiple lines of credit is important

Do you only have a couple cards and wonder why your credit score is so low? Well part of the answer may be because you have enough lines of credit. It’s important to have revolving lines of credit (credit cards) as well as installment loans (such as a mortgage or car loan). If you only have one type and not the other, that will impact your credit score.

Additionally, credit experts recommend having a few different types for each. For example, that might consist of a mortgage, car loan, and student loan under the installment loan category, and several different credit cards from different issuers under the revolving credit category.

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Neil, to keep the debt to income ratio at a “responsible, active” percentage, you wait and pay the balance after you receive notification that it’s due via the statement.

It’s good to pay in that window between the close date and due date. At the time of statement/billing to you, the balance the agency is asking you to pay has already been reported to the credit bureaus for that cycle. If you pay it in full after the statement date, and there is no activity between then and the next cycle close date, the vagrancy will report a 0 balance and the previous payment.

But you might want to spend a small percentage each month instead of keeping it a zero so creditors can see that you can handle debt instead of ignoring debt altogether, to show the responsibility. It’s all stupid in my opinion, but that’s how it works. You have to have credit to have good credit.

The credit card statement should actually tell you both the billing cycle open and close date, AND the due date. Same for energy bills, phone bills, etc.

So the best thing to do is pay the entire balance off before the billing statement is generated? Does anyone know if there is a standard number of days between when the billing statement is generated and the actual due date?