Credit scores are fickle, but they’re not as complicated to understand as some people think. If you are aware of how they work and what factors affect them, it will be easier for you to understand when yours changes. Of course, when your credit score drops it can be alarming if you aren’t prepared. Keep reading to learn everything that you need to know so that you can stop panicking and start taking action to make improvements.
Why Did My Credit Score Drop?
Take a minute to reflect on the past few months of your life. There could be any number of seemingly “typical” situations that could have impacted your credit score. Sometimes, people think nothing happened. Otherwise, they might think they did something good (such as paying down debt), only to find that their score went down instead of up. Regardless of the situation, education is the best answer.
Late or Missed Payments
The most obvious reason your score might drop is if you have late or missed payments on your credit cards or installment loans. The payment history accounts for as much as 35% of your credit score, so if you’re not paying on time, it’s going to have an impact. If you aren’t able to make payments within 30 days of the due date, they will be reported. If you have trouble paying at all, you should contact your lender or creditor immediately to discuss your options. You can also find a debt consolidation loan or find a debt settlement company.
Too Many Inquiries
If you have been applying for a lot of credit or loans lately, that’s also going to take a negative toll on your credit. Companies aren’t going to extend credit to someone who’s already applied for four cards– the accounts would be so new they might not be able to see whether you were approved or not. Plus, too many inquiries makes you look desperate, which could be a bigger financial risk.
Not Enough Revolving Credit
You’ve been working on paying down your credit cards and not using them, and that’s great. However, if you go too far, it can actually hurt your credit score. That’s right — there’s something to be said for paying down your debt rather than paying it off entirely. If you have all these open accounts with nothing charged to them, it looks like it’s just sitting there wasting away, and that can cost you points. Plus, inactive accounts can be closed without your knowledge, which will also hurt your score.
Paying off an installment loan can be a huge relief. However, it can also be a big hit to your credit score. Loans are one of the best things to have on your credit because they offer a long-term history of your ability to pay and they prove that you’re more creditworthy than just having a few credit cards. Thus, if you pay off your car loan or mortgage, your score could drop because you have one less major account and because your credit mix has changed.
New Account or Large Charge
If you open a new account or make a large purchase, it’s going to have an impact. Your debt-to-income ratio is a large part of your score, so when you buy a new car, for example, or even finance $5,000 for new furniture, you’re going to increase your ratio significantly. Since you’re not earning more money, this will hurt your score a little. As you continue to make payments and keep the account in good standing, this will change, but it will take some time.
If you close a credit card account, just as if you pay off a loan, it’s going to affect your credit. Even if you have an account that you haven’t used in five years, it’s better to leave it on your account. First of all, it gives you another account and it helps balance your debt-to-income ratio with the accounts you do use. Secondly, it helps secure your credit history. Closing old accounts makes your history look shorter, which makes you look like a less reliable credit risk.
Credit Report Mistakes
If there is a mistake in your credit report, it can have a negative effect on your score through no fault of your own. This could be something like a payment that wasn’t entered, or even a clerical error that transposed some numbers. It’s important to keep an eye on your credit report and notify the bureaus of any mistakes right away so that you can keep your score in good standing. You can request a copy of your free credit report here.
If there’s a huge change in your credit score out of nowhere, it might be the first sign of identity theft. Again, it takes a while for your credit report to catch up to credit usage, so this is something you should catch well before it gets to this point. Still, it can happen, and that’s okay if it does. Just notify the bureaus, lenders, and creditors immediately and make sure that you freeze any compromised accounts or cards. Here’s a list of the best credit monitoring services that include identity theft protection.
Late or Missed Payments
This accounts for 35% of a credit score.
Catch up on any late or missed payments and try to make on time payments in the future.
Too Many Inquiries
Applying for too much credit in a short window of time makes you look desperate.
Avoid applying for multiple credit cards, loans and lines of credit in a short window ofd time. This will most certainly affect your credit scores.
Not Enough Revolving Credit
Paying down debt is a great feeling. However, paying all credit card debt off while not using the cards can also hurt your credit score.
Use any open credit card accounts and keep credit utilization under 30%. Pay your credit card balances off every month.
Paying off a mortgage or car loan can actually hurt your credit scores.
Make sure you have loans out in your name and continue to make on-time payments every month.
New Account or Large Purchase
Be careful opening too many new accounts at one time. Its also best to keep your credit utilization under 30%.
Create a debt snowball plan and budget accordingly. Make a goal of reducing your credit utilization to under 30% or better.
This accounts for 15% of a credit score. Too many closed accounts can hurt you.
Try not to close accounts if possible. Instead, keep them open and charge the bare minimums every month. Remember to also pay off the balance at the end of the billing cycle.
Credit Report Mistakes
Credit report mistakes can be costly and damage your credit-worthiness.
Identify the mistakes in your report. You will need to write a letter to the credit bureau reporting the mistakes. If the bureau/s determine it is a mistake, it will be cleared from your record.
1 in 15 people become victims of identity theft every year. Don’t make the mistake of thinking it can’t happen to you.
Request a copy of your recent credit report monthly. Look for unusual activity and report it right away. Use a identity theft protection service if you can.
What You Can Do When Your Score Drops
The best thing that you can do to keep your credit score in check is to monitor it regularly and make sure that you are using your credit responsibly. There are plenty of tools and resources out there to help you be better with credit and that is something that you should take advantage of. Whether you’re trying to rebuild your credit, secure a loan, or just keep your score in a good place, this is important information to keep in mind.
Your credit score can fluctuate regularly for a lot of different reasons. Some of them aren’t worth worrying about because they’ll balance out in time. Others require your attention, so it’s important to know the difference. If you’re ever unsure, you can always talk to the credit bureaus and inquire about the score change, or dispute any information that you think is incorrect.
As long as you are aware of how your score is calculated and what can make it drop, you’ll be much more prepared to manage your credit use.
Credit Card Score Drop FAQ
It could be several reasons. You may be a victim of identity theft. Access an updated copy of your credit report ASAP. It’s also possible you have late or missed payments, have too many inquiries, credit report mistakes, recently paid off a loan, closed accounts, or you have zero revolving credit accounts.
Yes. The percentage it drops depends on several factors. How many credit card accounts you have, credit utilization and more. It’s best to keep the account open , make minimal charges every month, and pay the balance off at the end of the billing cycle.
You’ve finally paid off some, or all, of your debt. You might think your credit score will shoot straight to the top. But wait – it most likely will take a hit. The hit is only temporary. The best course of action is to continue to use your credit cards responsibly and pay balances off at the end of the month. And take out small loans to help beef up your credit history.
Evictions are not directly reported to the credit bureaus. Instead, the balanced owed — and most likely sent to a collection agency — is what will be reported. This could ultimately drop your credit score by 100 points or more. Avoid this by paying the balance owed before it gets sent to collections.
The bad news is a vehicle repossession will drop your score by 50 to 150 points and will stay on your credit report for 7 years. Avoid a car repossession at all costs.
You wouldn’t think it, but car loans will actually improve your credit score. Lenders like to see that you have open accounts and make on-time payments.
Checking your own credit score doesn’t affect the score. However, when lenders perform hard credit inquiries, this is where you might notice points drop. On average, each hard credit inquiry could drop by 5 points or less. Avoid applying for too many credit cards or loans from lenders in a short span of time.
The drop is only temporary. When you have a mix of different types of accounts, lenders view you favorably. If this is your only car loan, and you pay it off, your score may drop a few points but it is only temporary.
An unpaid debt sent to a collections agency could drop your score by 150 points or more. Avoid this at all costs and find a way to pay the balance before it is sent to collections.
The drop is only temporary but you could see your score drop by 15 points on the low end or as high as 40 points. Just make sure you make on-time payments and your score will not only return, but likely improve.
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