So your credit score dropped and you don’t know why. That’s frustrating. But a credit score won’t drop for no reason, and it may not even be your fault.
Here are the eight most common reasons for the credit score drop, and some ways to improve your credit score.
#1: Late Payments
Late payments happen to the best of us. Sometimes food, rent, and running water take precedent over debt payments. Or maybe your other responsibilities led to this small oversight.
But you don’t need to panic if you forgot to make this month’s payment. First, you typically have a grace period in which you won’t be charged any late fees — call your bank to see if you do and what it is.
If you’re outside the grace period and you rarely (if ever) miss payments, you can call you bank to ask if they can waive any fees assessed.
After your payment is 30 days late, they may (and probably will) report it to the credit bureaus, which is when your credit gets hit. And that late payment can stay on your credit file for up to a whole 7 years. And that’s not great for your credit — it shows future creditors that you may not be the most reliable person to lend money to.
But the only thing you can do is get back on-time with your payments and continue to make payments. Over time, your credit score will eventually be helped by this.
#2: Credit Utilization
How much you use your credit accounts also factors into your credit score. Your credit utilization refers to the amount of available credit you have at any given time. This is usually considered a very important factor in determining your credit score (i.e. a “high-impact factor”).
Why? Well, because it gives potential lenders an accurate picture of how responsible you are with your loans.
According to experts, your credit utilization rate should be 30 percent or below. To find out what your credit utilization is, follow this formula: (the total balance among all your credit accounts ÷ the total credit limit among all your credit accounts) X 100.
If you find that it’s well above 30 percent, you can do a few things to help bring it down:
- Spend less
- Focus on paying off more debt
- Ask your lender for a credit limit increase
#3: Paying Off a Loan
Yes, your credit can be affected after you pay off a loan. Which is weird. It feels great to pay off a loan, but that also leads creditors to believe your credit is less diverse.
It won’t have a huge affect on your credit, and you shouldn’t use up your credit limit out of obligation, but just be aware that paying off a loan could slightly change your credit score.
#4: New Credit
Any time you apply for a new credit card or loan, the potential lender will check your credit report (AKA a “hard inquiry”). This will then show up on your credit report.
A single hard inquiry usually is not worrisome. It’s when you have multiple hard inquiries in a short amount of time that your credit score can start to be affected by a couple points. This makes you look desperate for credit.
Because of this, try to apply for a loan only when you need it and only loans that you really think you’ll get.
#5: Closing Old Accounts
If you close an old credit account, that can feel really good. But just know that it can negatively affect your credit score. It sounds counterintuitive, but it’s true.
The average age of your credit history among all your accounts is a big factor in calculating your credit score. So when you close one, that’s going to lower the average credit age.
That doesn’t mean you shouldn’t ever close your credit cards or loans, but just be aware that it will influence your score.
#6: Identity Theft
Obviously, if someone steals your identity, what they do with your information could definitely hurt your credit score. But how do you know if someone stole your identity?
If you notice a large drop in your credit score with no clear reason why, that could be a sign that you’re a victim of identity theft. Also look for addresses on your account where you’ve never lived or accounts that you don’t recognize.
If you’ve already experienced identity theft, you can go to identitytheft.gov and file a report. Then you can take that report to the credit bureaus and dispute any related info plus place a freeze on your report.
Then check your report after 30 days of filing the dispute for any changes.
#7: New Public Records On Your Credit Report
The only public record that should show up on your credit report (if any do) is a bankruptcy, but they could also include a civil judgment and a tax lien (more rare). If a public record appears on your report, it could seriously hurt your credit.
If you’re having trouble paying bills yet still want to avoid a public record, try communicating with your lender to let them know your life situation. They may ask you when you think you can make the account current. It’s best to be honest with them — they may be able to work with you.
#8: Scorecard Hopping
Scorecards categorize people into those who are responsible with their credit and those who are not and everyone in between. FICO is the one who puts people in scorecards. And they don’t give us much info on how they work.
“Scorecard hopping” is when FICO puts you in a new scorecard, and this can affect your credit score. Even if they move you into a better scorecard, it can actually hurt your score. Why? Well, because now you’re being compared to a new group of people in that new scorecard.
The Bottom Line
So here’s the takeaway: there are a lot of things that can affect your credit score, ranging from minor to major problems. To stay on top of it, it’s important to be financially responsible.
With just a little extra effort, you can stay financially healthy and keep your credit score from dropping.