What Causes a Bad Credit Rating?

Your credit score provides lenders with a snapshot of how likely you are to default on a loan. Most lenders use the FICO credit score, which credit bureaus calculate using an algorithm developed by the Fair Isaac Corporation. FICO scores range from 300 to 850, with higher scores meaning a lower chance of default. Credit bureaus determine your score by compiling information about how you've managed your debt in the past. Having a higher credit score will get you a lower interest rate, but a bad credit rating will limit your borrowing options.

Bad Payment History

The largest factor in your FICO score calculation is your payment history, which accounts for 35 percent of your credit score. Your payment history suffers for seemingly small things, like late payments, as well as more significant negatives including delinquent accounts, collections and bankruptcies. These damaging records have a greater impact on your account if they happened recently, as opposed to further in the past. In addition, the longer the delinquency, the greater the impact on your score. A payment 15 days late will be less damaging than a payment 90 days late.

High Balances

The second-largest factor, accounting for 30 percent of your score, has to do with the amounts you owe. The more money you owe, the more your score will suffer, because you pose a greater risk of defaulting when you owe more money. Part of this evaluation also examines your debt-to-available-credit ratio. When your credit card balances take up more than 30 percent of your credit limit, your score will suffer as a result, according to MSN Money. For example, if your credit limit equals $4,000, you should try to keep your outstanding balance below $1,200.

Your overall debt-to-available-credit ratio is also considered. If you have two credit cards, each with a credit limit of $5,000, your total credit will be $10,000. If one has a balance of $3,000 and the other has a balance of $2,000, your total debt will be $5,000. Dividing your debt, $5,000, by your total credit, $10,000, would show you were using 50 percent of your available credit.

Many Inquiries

Inquiries refer to the number of times your credit score is pulled by lenders because you applied for credit, such as for loans or credit cards. Credit inquiries that you do not initiate, such as checks by an employer or checks that you perform on your own credit report, will not affect your score. The number of inquiries you have accounts for 10 percent of your credit score. When you have a large number of inquiries, your credit score falls. If you do not have a long credit history, you should space out your applications for credit. Your score will be negatively affected even if you do not use the cards on a regular basis. For example, if you apply for six store credit cards, even if you only use them only once to take advantage of a special discount, your score will still be damaged.