Can A Credit Score Drop For No Reason
Sometimes a credit score can go down for seemingly no reason at all. However, theres always an explanation behind a credit score decrease even if its hard to find or understand.
Credit scores used by lenders in the United States have to comply with a law known as the Equal Credit Opportunity Act . Per the ECOA, credit scoring systems must be empirically derived plus demonstrably and statistically sound. In plain terms, this means that credit scores have to be built using accepted scientific methods and they have to work.
If something causes one of your credit scores to drop, legally there has to be a reason . Remember, a lower credit score means your credit report now represents a higher risk to lenders. In other words, the odds of you becoming 90 days or more late on a credit obligation in the next 24 months have increased.
Below is a list of some unusual reasons your credit score might have decreased.
You Can Get Access To The Credit Report Your Lender Can See
A consumer getting access to the same version of the credit report as a lender is a myth. A provides a detailed version of your credit report to a lender. Whereas, you will receive the credit report in a much more concise manner where only the details you need to know will be provided, whether it is a free copy or a paid copy.
Reasons Your Credit Score Goes Down
When it comes to personal finance your credit score can play an important role in a lenders decision to offer you credit. This tool allows lenders to determine whether you qualify for products such as a credit card, loan or mortgage.
Having a strong credit history, with a good track record of keeping up with your payments, could help to further improve your chances of being accepted for credit should you ever need it.
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What Makes Your Credit Scores Go Down
First, its worth pointing out that you dont technically lose points from a credit score. Rather, when a new negative action on your increases your level of credit risk, you earn fewer points. Either way, the result is still a lower overall credit score.
Below is a list of common actions that might net you a lower credit score.
You Are A Victim Of Identity Theft
What if you check your credit history and see something besides an obvious error? If you think someone opened and used credit in your name, you may be a victim of identity theft. Signs of fraud include addresses you’ve never heard of or other personally-identifying info that doesn’t belong to you.
âSolution: Stop what you’re doing and file a report at identitytheft.gov, as well as your local police . Dispute data on your report with each reporting agency, and contact any companies that may have accounts under this false information. Many cards also have fraud alert options and the ability to freeze your credit so that more accounts can’t be opened while the situation is resolved.
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Someone Made A Mistake
Sometimes a credit score drop happens not because you did anything wrong, but because a mistake was made. Did a lender report a late payment when you have proof that you paid on time? Did a credit bureau accidentally add the account of someone with a similar name to your credit report?
The Fair Credit Reporting Act gives you the right to dispute any inaccurate information that shows up on your credit reports. If you need to dispute credit report errors, this helpful guide can show you how.
Insider tip
by FICO and VantageScore are built with similar goals in mind also called their stated design objectives. They predict the likelihood that youll pay any of your credit obligations 90 days late in the next 24 months.
Closing A Credit Card Will Build Your Score
Closing a loan may help build your score the same does not apply to a credit card. You may think of closing a credit card account that you seldom use. However, credit rating agencies consider this a negative move. According to the agencies, you must be capable of handling multiple credit lines well to get a good score. Even if you do not use an old card, it is advised to keep it active and make a nominal transaction with the card. Closing the old card account will not have any positive impact on your score.
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Paid Off A Student Loan Or Car Loan
Paying off any loan is an achievement that’s worth celebrating. But the types of credit you have also are considered high impact on your VantageScore® 3.0. This means having a good mix of credit between revolving debt and installment debt . If you pay off the only loan you have, that affects the diversity of your accounts.
How Can I Get A Personal Loan Without Hurting My Credit Score
Taking out a personal loan will affect your credit score. Thats unavoidable – taking out new credit – whether thats a personal loan, credit card or even a mortgage – will increase the amount of debt you have outstanding, and hit your credit score in the short term.
Thats not the end of the world though: youll usually increase your credit score by making repayments. For more information on this, take a look at our more detailed guides: does taking out a personal loan affect your credit score and does a debt consolidation loan affect your credit score?
Even if you cant completely avoid affecting your credit score, its still worth taking steps so that you dont needlessly hurt it.
With this in mind, the most important thing is to avoid failed applications and unnecessary hard credit checks.
In order to do this, take some time to understand your situation. All three credit bureaus allow you to check your credit file for free, and in doing this you can do two things:
Get a sense of how strong your credit score is
Check for any errors or identity theft that might be holding you back – credit bureaus are obliged to promptly correct them if you report them
You can use this knowledge, combined with an eligibility calculator, to get a better idea of which loans youre most likely to be accepted for. And if your credit score is in the fair category, you can take a look at our guide to loans for borrowers with a fair credit score.
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What To Remember When You Are Rate Shopping
If you need a loan, do your rate shopping within a focused period such as 30 days. FICO Scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which the inquiries occur.
When you look for new credit, only apply for and open new credit accounts as needed. And before you apply, it’s good practice to review your credit report and FICO Scores to know where you stand. Viewing our own information will not affect your FICO Scores.
As a general rule, it is OK to apply for credit when needed. Be mindful of this information so you can start the credit-seeking process with more confidence.
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You Closed Your Credit Card
Closing a credit card account, especially your oldest one, hurts your credit score because it lowers the overall credit limit available to you and it brings down the overall average age of your accounts. The length of your credit history makes up 15% of your FICO score, which is why experts recommend building credit at a young age. The longer you can show you have had credit, the better for your credit score.
The exception to this is if you are paying for a credit card that you no longer use. In today’s world where travel is nearly nonexistent, that may mean closing your luxury travel credit card with a steep annual fee, like the Chase Sapphire Reserve®, which new cardholders pay $550 per year for. It could also mean closing your secured credit card that you paid a deposit for to receive a credit limit, such as with the Capital One® Secured.
Before closing your card, talk to your issuer and see if you can either downgrade to a no annual fee card or, in the case of a secured card, upgrade to an unsecured credit card. This could help you preserve the credit line so that it doesn’t show up as being closed on your report, while getting you a card that’s better suited for your needs.
Information about the Capital One® Platinum Credit Card and Capital One® Secured has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.
Petal 2 Visa Credit Card issued by WebBank, Member FDIC.
Editorial Note:
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You Reached Your Credit Limit
Expensive sums on your credit card can have an impact on your credit utilisation ratio. Your credit utilisation ratio is calculated based on the total amount of credit across all balances divided by the total credit limit across all of those accounts.
Maxing out your credit limit, or a spike in your credit utilisation ratio can show instability – and many lenders and credit reference agencies will take this into account. The lower your credit utilisation ratio remains, the better – as it indicates that youre doing a good job of managing your financial responsibilities and not overspending.
What To Know About Rate Shopping
Research has indicated that FICO Scores are more predictive when they treat loans that commonly involve rate-shopping, such as mortgage, auto and student loans, in a different way. For these types of loans, FICO Scores ignore inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your scores while you’re rate shopping.
In addition, FICO Scores look on your credit report for rate-shopping inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry. For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14-day span. For FICO Scores calculated from the newest versions of the scoring formula, this shopping period is any 45-day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO Scores.
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You Recently Applied For A New Loan Or Credit Card
Whether you applied for a small $200 retail credit card or a big house mortgage, a new credit inquiry will be on your history. Lenders pull your credit as a way of seeing if they should approve you, and this act â since it is considered a âhard inquiryâ â can temporarily lower your score. Itâs not as big a drop as some actions, but each credit inquiry can add up over time and stays on your report for up to two years.
âSolution: This hard inquiry will eventually fall off your report. Be picky about what cards you apply for, and limit those hard inquiries to one or two per year . Eventually, youâll see the points return to your score.
What Is A Credit Score
A credit score is a number that summarizes your credit risk to lenders, or the likelihood that youll pay the lender back the amount you borrowed plus interest. The score is based on a snapshot of your credit report at one of the three major credit bureausEquifax®, Experian®, and TransUnion®at a particular point in time, and helps lenders evaluate your credit risk. Your credit score can influence the credit thats available to you and the terms, such as interest rate, that lenders offer you.
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Ask For A Credit Limit Increase
Give your credit card issuers a call and ask them to increase your budget. You might have to provide updated income and personal information.
This might be difficult if youve missed payments or youve been over the limit within the past 6 months to a year, but if its possible the credit increase can give you some cushion in your credit utilization. Remember, if a credit increase is available to you, this doesnt mean you should push your spending to the limit. Be smart about the increase and your card each month to keep below 30% utilization. Its worth a try!
You Closed An Old Account
If youve noticed a slight dip in your credit score and youve recently closed an account, this could be the reason why. Closing a credit card for example could increase your credit utilisation ratio as it could reduce your overall available credit. Credit utilisation refers to the amount of credit you have used compared with how much credit you have been extended by a lender. Your credit utilisation ratio is the amount you owe divided by your credit limit. For example, if you have an overall credit limit of £2,000 and you use £1,000, your credit utilisation is 50%. However, if you cancel a card, your limit is reduced to £1,500, youll be using 75% of
That being said, it doesnt mean you cant close an old account and in some cases it may be the right thing for you to do if you want to responsibly limit the amount of credit you can use. However, you may want to be careful about how you do it. Keeping hold of long-held and well-managed credit accounts can improve your score with some lenders as it shows youve been a reliable borrower in the past, which may suggest youre likely to keep up with your repayments. Its important that you make sure youve paid off any outstanding balances before trying to close an account as this can lead to missed payments, further affecting your credit score.
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What Exactly Happens When A Mortgage Lender Checks My Credit
The credit check is reported to the credit reporting agencies as an “inquiry.”
Inquiries tell other creditors that you are thinking of taking on new debt. An inquiry typically has a small, but negative, impact on your credit score. Inquiries are a necessary part of applying for a mortgage, so you can’t avoid them altogether. But it pays to be smart about them. As a general rule, apply for credit only when you need it. Applying for a credit card, car loan, or other type of loan also results in an inquiry that can lower your score, so try to avoid applying for these other types of credit right before getting a mortgage or during the mortgage process. Learn more about credit scores
Your Credit Utilization Has Increased
Maxing out your credit card could cause a quick drop in your credit score. Depending on your card’s credit limit, making a large purchase or simply running up your balance can increase your , the second most important factor in calculating your FICO® Score. An increased credit utilization ratio can indicate to lenders that you are overextended and that, financially, you’re not well-positioned to take on new debt.
Your credit utilization ratio is calculated by adding all your credit card balances at any given time and dividing that sum by your total revolving credit limit. For example, if you typically charge about $2,000 each month, and your total credit limit across all your cards is $10,000, your utilization ratio will be 20%.
You should aim to keep your credit utilization ratio below 30%, and for the best scores, below 10%. So, if your total credit limit is $10,000, keep your balances below $3,000 at all times to help keep your score in good shape.
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What Is A Soft Inquiry
A soft inquiry, sometimes referred to as a soft credit check, can occur for a few reasons, including:
- When you check your own credit score
- When an employer or landlord runs a credit check with your permission
- When a lender runs a credit check to preapprove or prequalify you for an offer
Soft inquiries don’t have an impact on your credit score because you’re not officially applying for credit. So when you fill out a form to get prequalified for a mortgage, student loan, personal loan or credit card, there are no strings attached.
Once you take the next step and apply, however, the lender will make a hard inquiry, which will show up on your credit report for others to see and can temporarily lower your credit score.
How Many Points Does A Hard Inquiry Affect Your Credit Score
A single hard inquiry will drop your score by no more than five points. Often no points are subtracted. However, multiple hard inquiries can deplete your score by as much as 10 points each time they happen.
People with six or more recent hard inquiries are eight times as likely to file for bankruptcy than those with none. Thats way more inquiries than most of us need to find a good deal on a car loan or credit card.
Realistically, only a narrow group of people has good reason to be cautious about the effect inquiries could have on their FICO score, Watt said.
Heres who might be concerned, according to Watt:
- People who take an unusually long time to shop for a new mortgage or auto loan.
- Consumers who shop around in the same year for several different lines of credit not associated with a mortgage or auto loan.
- People who know before they begin applying for credit presumably from conversations with creditors that their credit score barely qualifies them for their desired credit offering.
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