Why Is My Credit Score So Low If I Have No Debt?

Credit scores can influence some of your financial opportunities. Fortunately, you can find ways to improve your score. Credit scores can be confusing, especially when you don’t have debt. You might think that having no debt should mean you have a good credit score, but that is not the case. Credit score models influence your credit score, and debt is a portion of the model. 

How having no debt can still lead to a low credit score

FICO scores are the most commonly used credit scores. The FICO model was designed to predict consumers’ credit risk to help lenders determine whether a consumer can pay them back. You might be familiar with Equifax, TransUnion and Experian, the three main credit bureaus that keep everyone’s credit scores. 

The FICO model helps the credit bureaus generate their own score and report it to the consumer and potential creditors. You might notice that your scores from the three differ a bit based on how they receive their information, but overall they should be similar. 

When calculating your credit score, FICO looks at:

Payment history — 35% 

Credit utilization — 30%

Length of credit history — 15% 

Credit mix — 10%

New credit — 10%

Each factor has a different weight that impacts your credit score. Various weighted factors mean that even with no credit, your credit score could still be low because the length of your credit history or credit mix, for example, could also be low.

Reasons your FICO score is so low 

Now that you understand credit models and how they are weighted on your score, take a look at some reasons your score might be low. 

You use up your entire credit limit before paying off the balance

It is easy to swipe your credit card and worry about the payment later, but you want to keep an eye on your credit limit. Credit utilization accounts for about 30% of your FICO score, so if your credit utilization is high, like more than 30% of your limit, you can see a drop in your score. If you find yourself with a credit card close to its limit, make paying it off a priority to decrease your credit utilization.

You’ve missed payments

Forgetting to make a payment can happen to anyone, but it can be a costly mistake. Payment history accounts for 35% of your credit score — the highest percentage. Missing a payment can significantly impact your credit score. Set reminders or set up autopay to stay on top of your due dates. 

You’ve closed previous accounts

Credit utilization is your balance-to-credit ratio, so if you close an account, your credit ratio decreases. Credit age also plays a part in your credit score. Length of credit history accounts for 15% of your FICO score. Imagine closing an account that has been opened the longest on your credit report while lowering your balance-to-credit ratio. These together impact your score by 45%. If you pay off a credit card, consider keeping it open. If you worked hard to pay it off, consider not using it again while keeping it open — especially if it is one of your oldest cards. Try not to use it, and find out whether there are any annual fees or whether it will automatically deactivate if you go without using it.

You’ve applied for too much credit all at once

Each time you apply for credit, you will see a drop in your credit score. Typically, the score will come back up a few days later, but you could still have a hard inquiry on your credit for a few years. Try to keep your credit applications to a minimum. Be selective about what you apply for, and only do it if necessary. Decreasing your inquiries can help you mend your low credit score. 

You’ve suffered an identity breach

Data breaches are a common occurrence. In 2021, 45% of U.S. companies experienced a data breach. Data breaches occur when your private information is leaked to others, causing you to be susceptible to identity theft. 

During these data breaches, your Social Security number and identifying information can be easily accessible to someone. Someone can use this information to open credit in your name, using your data, without your knowledge. It can sometimes take months before this is brought to your attention if you aren’t constantly checking your credit report. 

At that time, identity thieves can open multiple accounts and sometimes allow them to go into collections, potentially causing your score to be severely impacted. If you find that you’ve suffered an identity breach, freeze your accounts and notify the credit bureaus. The process of fixing an identity breach can be time-consuming, but usually, it is resolved. 

Your report contains errors

Checking your credit report can help you recognize if you have been a data breach victim and if there are any errors on your report. Not all mistakes on your report are a result of identity fraud. For example, a simple error such as a transposed number or someone with a similar name can hurt your credit. 

You can address simple mistakes like this if you notify the credit bureaus. After an investigation to determine whether it was an error, you will find the issue rectified. It might take some time, so be patient and diligent. In the end, you can see a boost in your score. 

You’ve had bankruptcies or judgments 

After giving it much consideration, filing for bankruptcy can be the best option for some people. It can also impact your credit score. When you file for bankruptcy, it can take 10 years to fall off your credit report; however, each year, the negative impact will lessen.

When filing for bankruptcy, all collections activity stops, and your debt is no longer considered collectible. Judgments work a little differently. They no longer directly impact your credit score or show up on your credit report, but lenders can find judgments as they are public records. A lender could use this to decide whether you qualify for credit. 

You haven’t built up a credit history

Having no credit history can look like bad credit to lenders. It is hard to determine your creditworthiness with nothing to compare it to. 

Lenders consider the credit model mix when making credit decisions, and someone with no credit likely does not meet most of the requirements. You might receive a few credit offers, some with high-interest rates, but once you have established credit, you can start working toward fitting into that credit model. 

Ways to improve your credit score

It might sound like no credit makes it impossible to establish it, but not to worry — there are ways to improve your credit score and increase your approval odds. 

Stay up to date on payments 

Payment history accounts for the most significant percentage of your credit score. So staying up to date on your payments is a great way to improve your credit score. In addition, many creditors offer autopay options to help you remember payments. If you don’t like that option, set reminders, so you don’t forget. 

Pay off your balance in full every month

Paying your balance in full monthly is helpful because it helps keep your credit utilization low. Remember to keep accounts open if possible because it will keep your available credit amount low, and paying off your card will keep your debt low. The goal is no more than 30% credit utilization. 

Regularly check your credit report

Stay on top of your credit score by checking your credit report. You are entitled to a free credit report every year — use it. Download and review your credit report to check for fraud or mistakes. The sooner you catch them, the sooner you can get the ball rolling to make repairs. 

It might feel tedious or pointless, but this preventative step can be handy if you spot something. In addition, your credit report is an indicator of your financial health, so make sure you stay on top of it like your physical health. 

Don’t apply for too many new accounts

It might be tempting when you see credit card offers to apply, but try to hold off. Applying for too many accounts can knock your credit score down. 

Be mindful of any significant changes you have coming up and how they can impact your credit. For example, if you know you will be moving soon, keep in mind that you might have to have credit checks for housing applications or utilities. 

You might want to avoid any additional credit checks if you can around that time. This doesn’t stop you from applying for new accounts; just be mindful of what else you might need to use your credit for. 

Credit score not going up?

Building credit takes time, even if you have no debt, and once you do, you have the task of managing it properly. You might feel like your credit score is not going up fast enough. It’s a process. Stay on top of your payments, watch your credit utilization, be mindful when applying for new accounts and stay on top of your report. If you are doing the best you can, don’t stress. Your score will soon change.