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Bad Credit Even Though Bills are Paid on Time

Dear Experian,

Why is my credit bad? I paid every thing on time.

- WOD

Dear WOD,

There is a lot more to having good credit than just paying all of your bills on time, although that is extremely important.

Your payment history — whether you have paid your bills on time or late — has the greatest impact on credit scores. However, it typically accounts for less than half of the score, usually between 30 percent and 40 percent of the total.

Several other factors also are critical to being a good credit risk and having good credit scores. Your utilization rate, also sometimes referred to as your debt-to-limit ratio, can also significantly affect credit scores.

Your utilization rate is a comparison of your total balances to your total credit limits, expressed as a percentage. You can calculate that number by adding up all of your credit card balances and all of your total credit limits. Then, divide the total balance by the total limit.

A high utilization rate indicates you are overusing your credit and may be at risk of default, even if you haven't yet missed a payment. While you may be making the minimum payment each month, when you have very high balances as compared to your limits, just one unplanned for event could cause you to default on all of your debts.

Credit scoring systems also look at individual accounts. A very high balance on even one credit card can indicate some risk, and so can negatively impact credit scores, although less than your overall utilization rate. The question is, if one card is being charged to the limit, are the others soon to follow?

The length of your credit history is another factor. A short credit history gives less to base a judgment on about how you manage your credit, and so can cause your credit score to be lower.

A combination of these issues can add up to high credit risk and poor credit scores even when all of your payments have been on time.

The best way to find out what is specifically affecting your credit scores is to get a copy of your credit report and a credit score. Both provide detailed explanations of what is positively and negatively impacting your credit scores and creditworthiness, and enable you to tie those factors back to your credit report.

That information will empower you to create a plan to improve your creditworthiness over time so that you can get the credit you want and at the very best rates.

Thanks for asking.
The "Ask Experian" team

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