Seeing your credit score drop is pretty frustrating. Credit scores can fluctuate due to several factors beyond your control. However, your financial habits are the main culprit that makes your score change in most cases.
While a drop of a couple of points can go unnoticed, you cannot ignore a downward trend in your credit score. However, if you’re quick to point out what is causing the credit score drop, you can quickly take the right steps towards getting it back on track.
Let’s explore some of the factors that negatively impact your credit score and reasons why your credit might still fluctuate even when you don’t think you’ve changed your financial habits:
Missed or Late Payments
Payment history accounts for 35% of the FICO credit scoring models. Late and delayed payment can significantly hurt your score. Always ensure that you have settled all your debts, like paying your utility bills, cable, and other subscriptions on time.
While late payment of a few days may not show up on your credit report, a 30-day delay is reported as delinquent to the credit bureaus. Thus, you can expect a hit on your score from it. And it worsens if the delay is 60 or 90 days.
Those having trouble keeping track of due subscriptions and bills, especially if they have multiple loans and credit cards, can enroll in an automatic payment system. Paying all your bills on time helps maintain excellent credit scores.
If you miss a payment because it ended up somewhere in your spam email folder or because of a reason that was beyond your control, you could contact the creditor and ask to be forgiven just this once. It may work or fail, but it doesn’t hurt to ask. If the creditor agrees not to make the late payment report to the credit bureau, it will save your credit report from a negative mark for seven years.
Your Credit Utilization Has Changed
Your credit utilization ratio influences the credit scoring model. This ratio represents how much of your credit limit you are using or the amount you owe on your credit card relative to your credit limit.
If you get into a financial crisis and charge more on your credit card, your credit utilization rate may go up, in turn lowering your score. You only need to have a 30% credit utilization ratio to keep your credit in top shape.
If your spending habits remain constant, an increase in your credit limit may cause a drop in your credit utilization ratio, which in turn may increase your credit score. On the contrary, a drop in your credit limit would increase the utilization ratio and thus cause a drop in your score.
So, always check with credit card issuers to know when they change your total credit limit. Often, these companies will let you know if you qualify for a change in credit limit, though, in a few cases, they could make a change and fail to let you know.
To maintain a good utilization rate, pay down the high balances as soon as possible and switch back to using only a small portion of your available credit. Alternatively, consider asking for a higher credit limit and, if it’s possible, without a ‘hard inquiry’ which could lower your score by a few points.
In addition, consider opening a balance transfer credit card to increase your overall credit limit and lower your credit utilization rate. And if you’re eligible for a 0% introductory rate, you can pay off your balance faster.
You Closed a Credit Card Account
Once you put a halt to that crippling credit card debt, you may be tempted to make a vow to “never again” and decide to close down those credit card accounts. But did you know that closing credit card accounts could hurt your score?
Canceling a card could affect your credit score negatively since it reduces your available credit. So, if your spending habits don’t go down, the credit utilization ratio will increase, which will, in turn, cause a drop in your score.
Closing a credit card may also hurt your credit score if the average length of your credit history reduces. That’s because old accounts improve the average age of credit history.
Therefore, before you close those old accounts, consider if it’s really necessary. It would be better to hold onto them, but you must also keep them active if you want to maintain a good score. Alternatively, make a switch if your card issuer has a better card.
Errors in Your Credit Report
If your credit report information has some errors like transposed numbers, a payment reported late, or the wrong account, your credit score could drop. Therefore, it’s important to check your credit report to spot such mistakes. According to the Consumer Federal Protection Bureau (CFPB), credit report inaccuracies are common issues, and most Americans have had to deal with them at some point.
Request your annual free credit report to check the accuracy of the information available there. If you find an error on your report, plan how to dispute it with the credit bureaus and the reporting lender. Companies have a mandate to investigate the dispute for free and promptly correct the confirmed errors.
Derogatory Marks on Your Credit Report
Derogatory marks on your credit reports, including charge-offs, tax liens, lawsuits, case judgment, collections, bankruptcies, and foreclosures, hurt your credit score. They indicate that you did not honor a loan or bill payment in some way.
These marks can remain on your credit report for 10 years. That means your score could be affected negatively for a decade.
Thankfully, once those marks fall off your credit report, your score will recover. And you’ll notice an instant boost in the score if you keep your good credit behavior consistent. If the derogatory mark on your credit report isn’t legitimate, you can file a dispute to have it taken off.
You Paid Off a Loan
This sounds illogical. Well, paying a loan could make a negative impact on your score. First, paying off a loan means you have one less credit account. Also, it alters your credit mix. Having a good mix of credit helps keep the score in check. That means you have revolving credit such as a credit card and installment loans like auto loans, student loans, personal loans, or mortgages.
Well, that doesn’t mean you avoid paying your loans off. You can still have strong credit scores without having one of each type of credit.
The best way to avoid the drop in this scenario is to keep your other accounts active, pay all on time, and keep your credit usage low. This way, your credit will remain perfect as your track record with credit improves and has steady positive information.
You’ve Opened, or Applied for, Multiple Lines of Credit Recently
Opening several new credit accounts in a short period depicts a higher risk to lenders. Also, it means several hard credit inquiries have recently shown up on your credit reports.
Therefore, this action makes the credit scores dip. Hard inquiries remain on your report for two years, which means the negative impact will stick for that long.
The credit bureau groups the inquiries together if you apply for a mortgage or a car loan within 30 days. But, if you apply for a credit card in the same period, it will dip your credit reports for each credit card application, regardless of how close the hard inquiries are in days. Therefore, only apply for a new credit card if it’s really necessary, and you’re almost sure you will get approved.
Waiting for the two years until your score rebounds to apply for credit may help. But, make sure you space out the applications every 6 months.
You Were a Victim of Identity Theft
Identity theft is one of the most frightening things that anyone can experience. If someone steals your identity and applies for credit accounts in your name, it alters your score.
Sometimes, a big unexplained credit score drop is a sure sign of identity theft. Check for warnings on your credit reports like addresses of places you’ve never been to or accounts that seem unfamiliar. The sooner you discover the mess, the faster you can fix it.
Visit identitytheft.gov and file an identity theft report. Then, use that information to dispute your credit reports.
Check the credit report again after 30 days to confirm whether they corrected the errors. You may consider placing a fraud alert with a national bureau, and if you think the alert isn’t doing you any good, freeze your credit to protect yourself.
If you identify the imposter, don’t panic. Report to the authorities to take action. Then dispute the errors to correct the damage to your credit score.
If the thief is using your credit card, contact your credit card issuer. If it’s a stranger, you’ll have to replace the card, and you won’t be held responsible for the charges. If it’s a family member, try to resolve the dispute in the household. Also, consider setting up notifications to get alerts when your card is used.
You Co-signed a Loan or Credit Card Application
If you co-sign a loan or a credit card application for your friend or relative, it may not hurt your credit. But if the person you co-signed for fails to pay, delays payments, or runs a huge balance on the credit card, then it can cause your score to drop.
To avoid this, have the person send their statement to your address or give you access to their accounts online to watch for impending danger and address it early. You have cosigned the whole amount, and so it’s worth the trouble.
If the person cannot make the payments, you may consider making the payment to avoid leaving a negative mark on your credit. If it’s a credit card, you may pay it off or close it to reserve your credit score. But make sure you talk it out with the person to understand what is happening and find an approach that works for both of you.
Should You Worry About a Credit Score Drop?
It’s normal to see small fluctuations in your credit score, which shouldn’t cause much anxiety. But, it’s good to take note of drastic changes, which is an indication that something bigger is happening. It can be pretty worrisome if it’s a case of identity theft which can really drag your progress.
Also, keep in mind that a credit score can mean the difference between getting approved for credit products and services with great terms and being stuck with high interest rates. Excellent credit scores mean that you are creditworthy and not a high-risk borrower and vice versa. So, it’s always good to find ways to fix whatever makes your credit score go down.