Why Isn't My Credit Score Going Up?

Sometimes getting ahead feels more like a herd of turtles than a rabbit. That’s especially true when it comes to credit scores.

Check out this reader question, and see if you can relate.

Hi! I have a question for you. I’ve been working on improving my credit score for about three years now, but I cannot seem to raise it above 640. I have a few credit cards, with decent limits, not as high as I would like, and low utilization, a car loan, and nothing in collections for a few years. My credit reports say that low credit limits and time limits are hurting me, as well as the collection from a few years back (settled). What can I do? — CZ

Here’s your answer, CZ!

There are all kinds of things that can impact a credit score.

Why Is My Credit Score So Low?

Several years ago, FICO, creator of the most commonly used credit score, revealed how certain actions affect credit scores. Here’s a list of some of the most common score busters.

30-day late payment — 60-110 points.
Debt settlement — 45-125 points.
Foreclosure — 85-160 points.
Bankruptcy — 130-240 points.
Maxed-out card — 10-45 points.

The higher end of the ranges above would generally apply to those with the highest scores (780-plus) and the lower end to those with lowest scores (below 680). Keep in mind that a perfect FICO score is 850, and to get the best possible interest rates, depending on the lender, you’ll need 730 to 760.

Why Does It Matter?

CZ is right to be concerned about her credit score. Bad scores mean less access to credit and higher interest rates when an application is approved. Less access to credit can lead to lost opportunity, and higher rates can cost a ton of extra money.

Consider the mother of all debt: a mortgage. Say you’re borrowing $200,000 on a 30-year fixed-rate mortgage. Show up at the lender’s office with a 620 to 639 credit score, and at today’s rates you’ll pay 4.954%. If you make minimum payments, your total interest bill over 30 years will be $184,490.

But if you waltz in with a 760 or higher score, you’ll pay only 3.365%, and your total interest bill declines to $117,911.

So over the life of this loan, the lousy score will cost a borrower an extra $66,579. That’s enough to finance your own business, put a kid through college, or maybe retire a year or more earlier.

(By the way, the information above came from a calculator from FICO. Check it out for yourself.)

The Opportunity Cost of Bad Credit

Another even more dramatic way of looking at the same thing is to consider opportunity cost, a term describing how money you spend today can cost you in terms of the opportunity to have more money tomorrow.

Because of our low score, the higher interest rate on our $200,000 loan means a monthly payment of about $1,094 a month versus about $883 a month for a borrower with a higher score. So the person with the higher score has the opportunity to save about an extra $200 per month. If they use that opportunity wisely and invest their $200 monthly for 30 years and earn 8 percent on it, possible in the stock market, they’ll end up with an extra $298,000. That’s enough money to change your life.

In short, bad credit is expensive. If more people realized that, maybe we’d have fewer lousy credit scores floating around out there. According to the Corporation for Enterprise Development, in the third quarter of 2013 more than half of Americans had subprime credit, which generally means a FICO credit score of less than 640.

What Should CZ Do?

Now let’s (finally) get back to CZ’s question: “My credit reports say that low credit limits and time limits are hurting me, as well as the collection from a few years back (settled). What can I do?”

I doubt that low credit limits are hurting CZ. But if by “time limits” she means not enough time has gone by, I’m on board. I suspect that this was a seriously low credit score at one point. Otherwise, three years of on-time bill payments should have lifted her score over 640 by now.

She’s done what she can: Perhaps she’s gotten new credit. She has various types of credit, revolving (credit cards) and installment (car loan), and is keeping her utilization ratio low (not using all her available credit). She’s also hopefully paying her bills consistently and promptly.

What’s left? Time. Like many mistakes in life, when it comes to credit, it can take days to screw up and years to recover. Also like other mistakes, however, as time marches on, they have less influence. So if CZ has been doing everything right for three years, it shouldn’t be much longer before she sees significant improvement in her score.

This post originally appeared on Money Talks News.