What Caused My Credit Score To Drop?
It is never good to see your credit scores drop since the last time you checked. However, quickly identifying the root cause will help you make the right decisions to get your credit back on track.
A range of factors can cause credit scores to drop, including missed payments or late payments, changes in your credit utilization rate, changes in credit mix, closing old accounts (which could reduce your credit history overall), and applying for new credit accounts. Credit report errors or identity theft can also lead to a drop in credit scores.
Let’s take a look at nine reasons your credit scores may have fallen and what you can do to fix them.
Late or missed payment
Your payment history influences credit scores. FICO®, states that payment history is the most important component of its scoring model and accounts for 35%.
It’s unlikely that your credit reports will show up if you were only a few days late on a payment. However, if you have missed more than 30 days of payments, the card issuers will report it to the credit bureaus as delinquent.
You can expect to see a drop in your credit score if this happens. Your credit score could plummet further if the payment were reported as being 60- or 90 days late.
It can be hard to keep track of your payments, especially if multiple loans and credit cards. Enrolling in automatic payments is a smart choice if you are worried about your bills getting lost in the mail pile.
Derogatory mark on your credit reports
A derogatory mark on credit reports indicates that you have not paid a loan by terms. These are some reasons your bank or credit provider may have placed a negative item on your credit reports.
- Late payment
- A collection account (or charge-off).
- Tax lien
Derogatory marks are not removed from your credit report in two years, unlike hard credit inquiries. They’ll usually stay on your credit reports for seven to ten years.
This means that your credit score could be adversely affected by a derogatory marking for up to a decade. The good news is that the derogatory marks’ effect decreases over time.
You may also be able to get derogatory remarks removed from your credit reports. First, verify that the derogatory comment you see on your credit report is legitimate.
Contact the credit bureaus to dispute any derogatory remarks. Green Day Online members can access our Direct dispute TM feature for free to resolve the error.
Change in credit utilization rate
Another important factor that determines credit scores is your credit utilization ratio. This tells you how much of your credit you have available. VantageScore claims it is “extremely important” and FICO(r), that it makes up 30% of your overall credit score.
Your credit utilization rate will rise if you spent more than usual last month due to a large purchase, family trip, or other reasons. What effect will this have on your credit scores?
The impact will depend on how much credit was used and how much credit is available. The Consumer Financial Protection Bureau (CFPB) recommends keeping credit utilization rates below 30% to maintain credit scores.
Imagine you have $10,000 in credit, and you only use $1500 per month (15% credit utilization rate). Your utilization ratio at 25% will remain solid if your monthly spending increases by $2,500. Your scores may start to drop if you suddenly spend $5,000 (50% credit utilization rate).
Credit limit reduced
How can a lower credit limit lead to credit scores dropping? Your credit utilization rate will rise even if you spend less.
This is an example. For a credit utilization rate of 20%, you will typically spend $1500 on your $7,000 credit limit. This is great. Imagine your credit limit being reduced to $5,000. Your credit utilization rate would immediately jump to 30% in this scenario.
Take a look at your utilization rate if your credit scores are affected by a credit limit decrease. To improve your scores, you may need to decrease your credit card spending.
You might also consider opening a balance credit card. This could be beneficial on two fronts. It can increase your overall credit limit, which, in turn, helps lower your credit utilization rate. You may also be eligible for a 0% interest rate to help you pay your balance off faster.
You have closed your credit card
Closing a credit card can lead to credit scores dropping for a variety of reasons. The first is that if you close a credit card, your credit available will be reduced. If you don’t cut back on your spending, your credit utilization ratio is likely to increase.
Closing a credit card can also affect your credit score. This is because it could impact your credit history. Your average account age at closing an older account could be affected more. Consider whether closing your oldest credit account is necessary before you do.
You have paid off a loan
Paying off something can lead to your credit scores dropping. It may seem absurd, but it is true.
Paying off a loan could hurt your credit score. This is because it could affect your credit mix. A healthy credit score is best when you have a combination of installment loans and revolving credit, such as credit cards and mortgages.
However, this does not mean you should stop paying your loans to improve your credit score. It is possible to have strong credit scores even if you don’t have any of the different types of credit.
Have you recently applied for or opened multiple credit lines?
Lenders are more likely to approve multiple credit accounts within a short time. Your credit score may fall if you have had numerous hard credit inquiries on your credit report recently.
It is important to note that monitoring or checking your credit using tools like Green Day Online won’t impact your scores as it only results in a soft credit inquiry.
FICO(r) recommends rate shopping within a limited time frame. The credit bureaus will usually group your inquiries if you are looking for a mortgage or an auto loan in a short time frame.
However, if you consider applying for credit cards, remember that your credit report will be impacted for every credit card application you make, regardless of how many hard inquiries you have made in the past few days.
You should only apply for the credit cards you need.
Make a mistake with your credit reports
We’ve assumed so far that credit scores have dropped due to inaccurate information in credit reports. What if this is not true?
Lenders can make mistakes. It’s crucial to check your credit reports for any errors regularly. According to the CFPB, credit report inaccuracies are among the most frequent issues it deals with every day.
You have the right to dispute any credit report errors with the credit bureau or the reporting lender. The company must investigate and correct any confirmed errors promptly.
You were the victim of identity theft
Let’s talk about the terrifying reason for the dropping of credit scores: Someone could have stolen your identity and opened credit accounts under your name.
Don’t panic if you find out that someone is trying to steal your identity. You can take steps to reverse any damage to your credit score.
How do you detect identity theft? Credit monitoring is one option. You may be able to catch suspicious activity quicker if you keep an eye on your credit scores, credit reports, and other financial information. You’re entitled to one free credit report periodically from each of the three major consumer credit bureaus at annualcreditreport.com.
If you have been the victim of identity theft, you will likely create a recovery plan. A fraud alert could be a good place for you to start. Only one national credit bureau needs to be notified. The other bureaus will automatically notify you.
Once you have added the fraud alert to credit, you might want to complete an identity theft report with the FTC. If necessary, you can then begin disputing any inquiries regarding your report.
You may consider freezing your credit if you feel that the fraud alert is not doing enough to stop identity thieves. Credit freezes make it more difficult for fraudsters and others to open new accounts under your name. How to freeze credit.
Next steps : Finding Reasons Why Credit Scores Drop
Anxiety can result from your credit score dropping. You can often get your credit scores back if you identify the reasons for the decline.
These drops are temporary, regardless of whether you set up auto-pay to avoid missing a payment, dispute a derogatory comment, or correct a mistake in your credit report.
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