Credit Repair

Why Did My Credit Score Drop?

While it’s normal for credit scores to fluctuate over time, a big drop in your credit score when you think nothing has changed about your finances can be cause for concern. But credit scores don’t change randomly, so if your score dips, there’s a reason for it.

We’ll walk you through common scenarios that can lower your credit score and ways to recover after a credit score drop.

7 reasons your credit score might drop

1. You paid late or missed a payment

Paying on time is the single most important factor impacting your credit score. It constitutes 35% of your FICO Score and 41% of your VantageScore. Late payments can tank your credit score.

If you miss your credit card payment date by a day or two and then make the payment promptly, you might get hit with a late fee, but your credit score probably won’t suffer. Issuers often allow 30 days before reporting a late payment to the credit bureaus (some may allow as much as 60 days). But once it does get reported late, your credit score could drop roughly 90 to 110 points.

Finally, there may come a point where your original creditor gives up on collecting the debt and sells it off to a debt collection agency. These companies frequently use aggressive tactics to reach debtors and convince them to pay up, and your credit reports will show that you’ve had a debt sent to collections — which will make other lenders unlikely to extend you credit.

How to fix it: If this is the first time you’ve missed a payment, it’s worth calling your credit card issuer and asking for the late payment to be forgiven and not reported to the credit bureaus. Acting promptly is key, because once the payment is reported as late, it generally cannot be removed. Also, know that if you’ve paid late before, such a request is unlikely to be successful.

2. You max out a credit card

The technical term for how much of your credit you’re using compared with how much you have available on your credit line is called utilization. To calculate your credit utilization, say you have a credit card with a $1,000 credit limit and you’re carrying a balance of $300, that means your utilization is at 30%. Personal finance experts recommend keeping your utilization well below 30%, and the closer it is to zero, the better for your credit score.

Tip: Loans are not factored into your credit utilization ratio, only revolving credit accounts, such as credit cards.

When you max out a credit card or get close to maxing it out, lenders see this as a risk that you won’t be able to pay back what you’ve charged to the card. For that reason, utilization has a significant impact on your credit score, accounting for 30% of your FICO Score. In other words, it’s the second most important factor to building good credit behind making on-time payments.

How to fix it: Reducing your balances is one of the quickest ways to increase your credit score. If you have multiple cards with balances, focus your debt payoff strategy on the ones with the highest utilization ratios.

3. Your issuer reduces your credit limit or closes a credit card

Though it may come as a shock if it happens to you, your credit card issuer is allowed to reduce your credit limit or even close your card at any time. This is more likely to happen during tough economic times when lenders want to reduce their exposure to possible defaults or when the card is inactive for an extended period.

If your credit limit is lowered or your card is closed, and you’re carrying a balance, your utilization will suffer. For example, if you’re carrying a $300 balance on a card with a $1,000 credit limit and your credit limit is slashed to $500, your credit utilization jumps from 30% to 60%. Similarly, a closed card account will remove that credit line from your overall credit utilization, which will hurt your credit score if you’re carrying high balances on other credit cards.

How to fix it: The first thing to do when a card is involuntarily closed or its credit limit is slashed is to call the phone number on the back of your card to get an explanation. If the issuer won’t restore the card or the credit limit, then the best action you can take is to open another credit account. Keep your balance under control and keep cards active by making small purchases on them and setting up autopay so you’re never late with a payment.

4. You applied for a loan or new credit card

When you apply for a loan or credit product, such as a mortgage, auto loan, personal loan or credit card, the lender typically reviews your credit history, which results in a hard inquiry on one or more of your credit reports.

A hard inquiry can ding your score from 5 to 10 points, and stays on your report for two years. So even if you’re approved, just the act of applying for credit can hurt your credit score.

It’s also worth noting that new credit makes up 10% of your credit score. From a lender’s viewpoint, rapidly opening several new credit accounts can signal that you are having financial challenges.

How to fix it: The good news is that each hard inquiry just knocks a few points off your credit score and its impact will lessen after a year (and hard inquiries will fall off your credit reports after two years). When shopping for a car loan or mortgage, those inquiries are often lumped together as one hard inquiry if made within a 30- to 45-day period. The lesson here is to apply for new credit judiciously and space out applications over time.

5. Your credit report has wrong information

If your identity has been compromised and someone fraudulently applies for new credit using your personal details, this could result in a drop in your score for both the hard inquiry and perhaps defaulted payments.

Also, incorrect account information, such as an error in bill payment history, could harm your score. Make a point to check your credit reports using annualcreditreport.com. By law, you’re entitled to one free credit report from each credit bureau per year, and through April 2021, the bureaus are offering free weekly reports.

How to fix it: If the error is reported by a lender, then try to resolve the situation with the lender first. If you are unsuccessful, you can file a dispute to get incorrect information on your credit reports investigated. To be safe, make sure to review your reports from all three credit bureaus — Equifax, Experian and TransUnion. You’ll only need to file one dispute as the bureaus as required to notify the others. Once a dispute is filed, you should receive an answer within 30 days.

6. You’ve had a bankruptcy or foreclosure

A bankruptcy or foreclosure can severely damage your credit score — and since you likely missed payments leading up to the event, your score will reflect that, too.

A Chapter 7 bankruptcy will stay on your credit reports for 10 years, while a Chapter 13 bankruptcy will stay for seven. A foreclosure will stay on your reports for seven years from the date of your first missed mortgage payment that led to the lender foreclosing on your property.

How to fix it: After a bankruptcy or foreclosure, you may be able to rebuild credit with a secured credit card. To get one, you must submit a security deposit in the amount of your desired credit limit, protecting the issuer in case you default on what you charge to the card. However, be aware that as with any credit card application, approval for a secured card isn’t guaranteed.

Another tool for rebuilding your credit is a credit builder loan. With a credit builder loan, you don’t get money up front. Instead, you pay money to a financial institution that will put it into a savings account or certificate of deposit (CD) for you. At the end of your loan period, the money from the savings account or CD will be disbursed to you. As long as the lender reports to the credit bureaus, you’ll build positive payment history by paying on a credit builder loan.

You may be able to get a credit builder loan from a smaller bank, a credit union or an online lender such as Self.

7. You recently paid off an existing loan

While paying off a loan is a positive thing, it can still hurt your credit score because it can reduce your credit mix, which makes up 10% of your credit score. What your credit mix considers is whether you have both revolving credit, such as credit cards and installment credit, such as mortgages, auto loans and student loans.

How to fix it: Your credit score is likely to recover quickly enough from such a dip as long as you’re exercising responsible behavior on your remaining credit accounts. Don’t let a fear that your credit score may decrease slightly prevent you from paying off your loans as quickly as you can.

What is a good credit score?

The credit-scoring model lenders generally use is the FICO Score, which ranges from 300 to 850. Your FICO Score will fall into one of five tiers, ranging from poor credit to exceptional:

  • Exceptional: 800 or higher
  • Very good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: less than 580

Here are the factors that impact your FICO Score (and their respective percentages):

  • Payment history (35% of your credit score)
  • Amounts owed (30% of your credit score)
  • Length of credit history (15% of your credit score)
  • New credit (10% of your credit score)
  • Credit mix (10% of your credit score)

9 ways to improve your credit score

If you’re looking to improve your credit score or just want to keep it going strong, there are steps you can take to maintain a healthy credit score. Follow the steps below to build good credit:

  1. Pay your bills on time.
  2. Keep revolving credit balances low.
  3. Set up autopay and alerts to ensure you pay your bills on time.
  4. Pay down debts to reduce your debt-to-income ratio (DTI).
  5. Check your credit reports regularly.
  6. Show lenders you can manage both lines of credit and loans responsibly by maintaining a good credit mix.
  7. Apply sparingly for new credit.
  8. Enroll in Experian Boost, which allows consumers to build credit through recurring payments such as your utility bills, a cellphone plan or a Netflix subscription.
  9. Work with a nonprofit credit counseling agency associated with the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).

As mentioned earlier, it’s normal for credit scores to fluctuate over time. If you notice that your credit score has dipped a few points, it may due to something simple such as a big purchase you recently put on your credit card — which would increase your utilization rate.

However, if you notice that your credit score has dropped a substantial amount, such as 50 to 100 points, that’s cause for concern. After noticing such a dramatic drop, check that you haven’t missed a payment or suffered fraudulent use of your information or one of your accounts.

 

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