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What Causes Your Credit Score To Go Down

Learn The Factors That Determine How You Rate

Why Your CREDIT SCORE Went Down!

Marcus Reeves is a writer, publisher, and journalist whose business and pop culture writings have appeared in several prominent publications, including The New York Times, The Washington Post, Rolling Stone, and the San Francisco Chronicle. He is an adjunct instructor of writing at New York University.

A credit score is a three-digit number that helps financial institutions evaluate your credit history and estimate the risk of extending credit or lending money to you. Credit scores are based on information collected by the three major , Equifax, Experian, and TransUnion. The most common credit score is the FICO score, named for the company that devised it, Fair Isaac Corporation.

Your credit score can be a deciding factor in whether or not you qualify for a loan and, if you do, the interest rate you’ll pay on it. It may also be used in setting your insurance rates and even be consulted by prospective employers and landlords. This article will explain how your FICO score is calculated, what information is not considered, and some common things that can lower your credit score or raise it.

You Closed An Account

Closing a credit card account can affect your credit score in a couple of ways.

If you close one account, but still have a balance on other cards, closing your account can increase your credit utilization score. Even though your total debt remains the same, you have less available credit. Closing the account decreases your total credit limit. This means your current debt is higher relative to your new lower total credit limit and available credit balance.

Additionally, closing a long-running credit card account can impact your score differently. Generally speaking, the older the average age of your account, the better your score. Lenders like to see that you have accounts with a long history of on-time payments. If you close an account thats been open for a long time, it can bring your credit score down.

Generally, youll be the one authorizing a credit card to close, but card companies can also close your account without your knowledge.

Why Did My Credit Score Drop After Paying Off My Loan

Your credit score is calculated using a specific formula. Your score is an indicator for how likely you are to pay back a loan on time. Several factors contribute to the credit score formula, and paying off debt does not positively affect all of them. Paying off debt may lower your credit score if it changes your credit mix, or average account age. Here are some scenarios that could negatively affect your credit score:

  • You eliminated your only installment loan or revolving debt: Creditors like to see that youre able to manage various types of debt. If eliminating a particular debt makes your credit report less diverse, it can negatively affect your score. For example, if you pay off an auto loan and are left with only credit cards, your suffers.
  • Youve increased your overall credit utilization: Keeping the overall utilization of your available credit low results in a better score. But when you pay off a revolving line of credit or credit card in its entirety and close the account or let the account go inactive , it decreases the total amount of credit you have available, potentially increasing your remaining utilization rate.
  • Youve lowered the average age of your accounts: The longer your accounts have been open and in good standing, the better. Having a 20-year old account on your report is a good sign, even if you dont use it closing that account and being left with accounts no more than five years old dramatically reduces the average age of your accounts.

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Why Did My Credit Score Go Up

Due to the amount of information thats used to calculate your credit score, its easy to see how your score can fluctuate.

Heres why you might see a bump upwards in your score:

  • A negative listing is expired or old. Information is only held on your credit report for a certain length of time, so when a negative listing is removed from your credit report, your credit score should increase.
  • You changed your credit limit. Requesting or receiving an increased limit on your credit card can positively impact your credit score because you have more available credit at your fingertips. However, you might see an initial drop because of the request, but if approved your score will typically shoot back up. Credit increase requests should be limited to every two to three years.
  • Older accounts. The longer youve had a credit account, the better your score will be because the length of your credit history is always aging. The amount of time youve had your credit accounts open for represents about 15% of your credit score.
  • Diversifying your credit. When you responsibly manage different types of accounts home loan, personal loan and credit cards it broadens the financial diversity of your credit history and may improve your score.
  • Managing your credit. By making on time payments, paying your due balance in full each month and not irresponsibly using your credit, youll likely see your credit score go up but be patient, it takes time.

Bad Information Has Aged On Your Credit Report

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Late payments, debts in collections, loan defaults, and other black marks on your credit report certainly lead to decreased credit scores. The good news is that as these issues fade into the past, they begin to have less of an impact. And, eventually, theyre no longer considered at all in calculating your score.

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Why Did Your Score Change

Your credit score gives lenders a sense of your debt-repayment history. Although different models are used to calculate your score, they all take the same financial behaviour into account. Your credit score is calculated based on your payment history, the amount of money you owe, the length of your credit history, the type of credit you have, and the new credit that has been added. A change in your score means one of those factors has changed.

You Applied For Multiple Credit Products

When you apply for credit, a lender usually performs a hard credit check to review your creditworthiness. Each credit inquiry can temporarily drop your credit score by up to five points for one year, according to FICO. So if youve applied for multiple credit products over a long period of time, this can cause your credit score to experience a pitfall.

However, if youre rate shopping for a mortgage, student loan or auto loan within a 14- to 45-day window, FICO only counts it as one hard inquiry.

To reduce the impact on your credit score, apply for credit only when needed.

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Should I Apply For Another Loan

If you have paid off a debt and are looking to keep up your credit score, you may be wondering what you can do. If you close a loan, it may seem like opening another loan will keep your credit score points high. However, applying for another loan may only help your credit score in certain scenarios.

If the loan you closed was held for a while, meaning you had a long credit history with that loan, opening a new loan wont help with any credit score points lost. A new account wont bring you any wins with credit history length.

However, if paying off a loan means you lose some diversity in your credit portfolio, applying for certain types of loans could help your score. You get some points for having different types of credit . If the loan you pay off is the only one you have of its kind, you could gain some points back by opening a new type of loan. For example, if you pay off your car loan and are left with only credit cards, consider applying for a different type of loan.

A bigger contributing factor than credit mix for your credit score is whether you can make payments on time. If applying for a new loan will impact your ability to make any payments on time, you shouldnt risk applying for the new loan.

Shouldn’t Paying Off Debt Help My Credit Score

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To be sure, creditors want you to repay them when they lend you money, so it seems reasonable that paying off debt would help your credit score. But that’s not exactly how credit formulas work.

the portion of your credit limits that you are currently using is a significant factor in credit scores. It is one reason your credit score could drop a little after you pay off debt, particularly if you close the account. Having low credit utilization is good.

Other factors that credit-scoring formulas take into account could also be responsible for a drop:

  • The average age of all your open accounts. If you paid off a car loan, mortgage or other loan and closed it out, that could reduce your age of accounts. That’s also true if you paid off a credit card account and closed it.

  • The types, or “mix,” of credit you have. Scores reward you for having both installment accounts and revolving accounts .

Let’s say you just made the final payment on your car loan. Your payment history is perfect and you keep credit card balances low. But now you have one less account, and if all your remaining open accounts are credit cards, that hurts your credit mix. You may see a score dip even though you did exactly what you agreed to do by paying off the loan.

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Some Lenders Use Industry

In addition, some lenders may use a credit scoring model that’s specific to a certain industry, which may not generate the same score you receive from one of the three nationwide CRAs. For instance, if you’re buying a car, the lender may look more closely at your payment history regarding auto loans.

While credit score fluctuation is normal, it’s important to ensure the changes don’t result from inaccurate or incomplete information on your credit reports. Therefore, it’s a good idea to regularly review your credit reports from the nationwide CRAs.

Changes In Ficos Formula

The FICO formula changes occasionally, most recently in December 2016. The purpose is to keep up with the changing needs of consumers and lenders. As well as the standard model, there are also industry-specific versions, such as for the auto-lending industry.

Obviously, there have been several different versions of the FICO scoring model, and lenders have the option to choose which version they are going to use. Since different versions of the formula look at things slightly differently, your credit score may change if a lender begins to use a different version.

The table below shows the wide variation in the versions used by different lenders in different industries:

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You’ve Experienced A Major Event Such As Foreclosure Or Bankruptcy

The late payments that often lead up to a bankruptcy or foreclosure harm your credit scoresand the events themselves can make matters worse.

Bankruptcy is a legal process initiated by borrowers looking to get relief from debt payments, and it’s the most harmful single event to a consumer’s credit. Foreclosure is when your mortgage lender takes possession of your house, often following four consecutive months of missed payments, and is second only to bankruptcy in terms of credit harm.

In addition to damaging your credit score, either event can disqualify you from certain types of borrowing in the future. A mortgage lender may be unlikely to take you on as a borrower if you have a foreclosure in your past, for instance. A legitimate foreclosure mark on your credit report will stay there for seven years.

The amount of time a bankruptcy stays on a credit report depends on the type of bankruptcy filed. Chapter 7 bankruptcy, for instance, appears on your report for 10 years from the date you filed, while Chapter 13 bankruptcy appears for seven years.

Your Bankruptcy Fell Off Your Credit Report

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When bankruptcy falls off your credit report after seven years , you’ll likely move to a new credit scorecard, similar to what happens when a collection drops off your credit score. You could see a drop in your credit score because now your credit performance is being compared to other people who haven’t filed bankruptcy.

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How Do I Keep My Credit Score From Dropping

Once youve gotten your balances to zero, heres how to guard your credit.

Make it easier to pay on time. Set up reminders to pay bills. You can set up calendar reminders, or get emails or text alerts from most issuers.

Watch for credit report errors. Any attempt to build your credit will be fruitless if the data going into your scores is wrong.

You can get free credit report information two ways: Some personal finance websites and credit card issuers offer report information. And youre entitled to at least one free report directly from the credit bureaus.

The reports you can get annually from the three credit bureaus can run to dozens of pages.

If you see an error, dispute it. Someone elses file mixed up with yours or identity theft could potentially and unfairly hurt your score. The sooner you address that, the better.

Dont apply for multiple credit products in a short time. Opening a new credit account lowers the average age of your credit accounts and involves a hard inquiry, which can result in a small, temporary drop in your score. If you can, wait at least six months between credit applications, and do your before you apply.

Practice patience. Sometimes the best thing you can do for your credit is wait. A combination of patience and good habits will help any credit score bounce back. Most credit missteps fall off your credit records in seven years.

Someone Else Missed A Payment

If you co-signed on a loan or a credit card for a friend or family member, youre responsible for making sure the payments are made on time.

When the person you co-signed for misses a payment or runs up a large balance, its your credit score thats on the line, unfortunately.

What to do:

If youre worried the person you co-signed for might not be able to make their payments, you should set up the account so that you can monitor it online.

Schedule a reminder on your calendar app for a few days before the monthly payment is due, and check the statement to make sure that its been paid up.

In the event that the payment has not been made, you might need to cover it yourself if you want to prevent your credit score from taking a hit.

You also should consider having a talk with the person you co-signed for, and explaining that your credit score has been affected. It might be a bit awkward, but, unless your family member or friend starts making timely payments, the only alternative is to close the account.

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Why Is My Credit Score Dropping

Its hard to make any kind of financial decision these days without considering how it might impact your credit score. And its no wonder! Your credit score could make the difference between getting that rental apartment youve been eyeing or even qualifying for a great cell phone plan or insurance rate. The truth is many important financial transactions rely on your credit score. Thats why its important to know if your credit score has dropped and what might have caused it.

Its always a good idea to track your credit score. Not only can significant changes in your credit score help you identify potential cases of identity theft and fraud, but they can also help you address any discrepancies in your credit report and take the necessary steps to correct actions that might be causing your credit score to drop. For this reason, many Canadians have started tracking their credit score regularly and checking with both Equifax and TransUnion to get updates when it does change.

Have you ever wondered, Why is my credit score dropping? or How can I improve my credit score? Lets go through what a credit score is and how you can take control of it!

Tips For Improving Credit Score After Paying Off Debt

Why did my credit score go down? | Rebucketing

While paying off your credit card debt is important, what matters more is on-time payments and your utilization rate. Many times, borrowers will ignore these factors, thinking that clearing up their debt as quickly as possible is the key to a stellar score. But there are a few other methods to consider:

  • Be strategic with the order in which you pay off your debts. Personal loans and credit cards often have higher interest rates than mortgages, car loans and student loans. Paying off those first not only helps keep your credit utilization in check, but will also save you money in interest. You can also use a debt paydown calculator to help .
  • Check your credit utilization. If youve paid off your debt and your credit score went down, look at just how much of your credit you are using. If its above 30 percent, you might consider charging less each month. If that isnt an option, you could speak with your issuer about increasing your credit limit. Both of those should help increase your credit score.
  • Open another credit card. While opening accounts could temporarily lower your score due to hard credit checks, opening a new card could increase your total available credit and spread your charging among several cards.

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