07 Aug Why is My Credit Score Negative? A Guide to Credit Health
Have you ever checked your credit report and found that your score was in the 500s.., or even below 500? You might have felt shocked or angry that your score was so low and wondered why. Credit scores tank for numerous reasons; factors like payment history, derogatory marks, and recent activity all contribute to those decisive 3 digits.
Payment histories and credit scores are the standard against which lenders and banks measure your creditworthiness. If you have a low credit score, you won’t likely be able to take out finance because creditors will be nervous you could default.
This post discusses why your credit score could be negative and how to fix it.
How Credit Scores Are Calculated
Understanding how credit scores are calculated is essential to identifying issues with your credit health and relationship with money.
Credit scores are calculated differently depending on the bureau. Most bureaus, like Experian and Equifax, use the FICO–Fair Isaac Corporation– scoring model. TransUnion uses VantageScore, employing data from across all major bureaus. Lastly, South African XDS (Xpert Decision Systems) has its own scoring model.
FICO, VantageScore and XDS have their respective means of calculating scores; however, all 3 reference the same factors in their scoring algorithm: account balances, credit utilisation rate, payment history, payment history length, recent inquiries, and recent payments.
Account balance and credit utilisation rate
What you owe on your account (account balance) goes hand in hand with credit utilisation rate. The higher your debt is compared to what you have available to spend (credit utilisation rate), the lower your credit score.
Payment history
Payment history is one of the biggest deciding factors in credit scoring. If you pay late, partially, or not at all (defaulting), your score will plummet. The amount of time your accounts have been open also influences your credit score; lenders like seeing that you have long-term experience using credit.
Marks on report
Marks like debt review, judgments, administration orders, sequestration, and bankruptcy don’t bode well with lenders. They perceive these as signs you will default. Late payments, partial payments, and numerous hard inquiries are further indicators you are irresponsible with credit.
Credit mix
The different sorts of credit you’ve taken out like secured and unsecured loans, short-term and long-term, revolving and instalment, etc. diversify what is called a credit mix.
How to fix your credit score
Now that you’re familiar with how your score is calculated, you can identify the problem areas in your report. First, get a copy of your credit report from Credit Boost’s free online credit checker. The report will detail what you owe on your account and payment history. Use these details to decipher your credit utilisation rate, and check your credit mix diversification and payments to clean your credit score fast.
If your credit utilisation rate is high (over 30%), consider paying debt. If you have derogatory marks like judgements or debt review, use a credit clearance service to help you dispute them with the bureaus. You might also consider reducing the amount of hard inquiries in your report. Lots of these show lenders that you’re desperate for credit.
If you need help fixing your credit report, get in touch with Cape Town Legal Consultants. We help thousands of South Africans dispute negative items like judgements, debt review, admin orders and more with disputing with the credit bureaus to get a good credit score in South Africa.