Credit Scores: 5 Reasons Why Most Americans have a Credit Score under 800
1) Inconsistent Payment History
One of the primary reasons many Americans have credit scores below 800 is inconsistent payment history. Payment history makes up about 35% of a credit score, making it the most influential factor. Many people miss payments or make late payments on their credit accounts, which can significantly lower their scores. Even a single late payment can have a substantial negative impact, especially if it occurred recently. Additionally, factors such as defaults, bankruptcies, and accounts in collections can severely damage one's credit score. Maintaining a consistent on-time payment record is crucial for achieving and sustaining a high credit score. However, life events such as job loss, medical emergencies, or unexpected expenses often lead to missed payments, affecting many Americans' ability to maintain a perfect payment history.
2) High Credit Utilization
Another common reason for lower credit scores is high credit utilization. This ratio, which accounts for about 30% of a credit score, measures the amount of credit used compared to the total available credit. Many Americans carry high balances on their credit cards, often nearing their credit limits. This high utilization indicates to lenders that an individual may be over-reliant on credit and poses a higher risk. Ideally, keeping credit utilization below 30% is recommended, but many people struggle to maintain this threshold due to various financial obligations. Additionally, unexpected expenses can lead to higher credit card balances, further increasing credit utilization and negatively impacting credit scores.
3) Short Credit History
The length of credit history contributes about 15% to a credit score, and many Americans have relatively short credit histories. A shorter credit history provides less information for lenders to assess an individual’s creditworthiness. Younger adults, those new to using credit, and individuals who have closed old accounts may find their credit history length working against them. Keeping older accounts open and maintaining a long, stable credit history is beneficial, but this takes time. Many Americans, particularly younger individuals, are still in the process of building their credit history, which keeps their scores from reaching 800 or higher.
4) Limited Credit Mix
The diversity of credit accounts, known as credit mix, affects about 10% of a credit score. Many Americans do not have a varied mix of credit types. They might rely primarily on credit cards and have fewer installment loans such as mortgages, auto loans, or student loans. Lenders like to see that borrowers can manage different types of credit responsibly, as it indicates a broader ability to handle various financial obligations. However, having a diverse credit mix can be challenging, especially for those who have not yet needed or qualified for different types of credit. This lack of diversity in credit accounts can prevent many Americans from achieving an excellent credit score.
5) Frequent New Credit Applications
New credit inquiries account for about 10% of a credit score. Many Americans frequently apply for new credit, resulting in multiple hard inquiries on their credit reports. Each hard inquiry can cause a small, temporary dip in a credit score. When these inquiries accumulate, they can significantly lower the score, especially if the new credit accounts increase the individual’s overall debt load. Additionally, opening several new accounts within a short period can shorten the average age of accounts, which also negatively affects the length of credit history. Many Americans may apply for new credit due to financial necessity or to take advantage of promotional offers, but this practice can hinder their ability to achieve a high credit score.