Your Last Collection Dropped Off Your Credit Report
When calculating credit scores, credit scoring models place people in different buckets, known as scorecards. Your credit profile is compared to other people in your scorecard to come up with your credit score. While you may have been at the top of one scorecard with the collection on your credit report, you may fall to the bottom of a different scorecard if any negative information falls off your credit report.
This type of credit score drop is outside of your control. Fortunately, as long as you keep paying your bills on time and keep your debt low, your credit score will improve.
Your Credit Score: Know Your Rights
One of the essential facts about your credit score is that it is available to you whenever you want to review it. Thanks to federal laws enacted under the Fair Credit Reporting Act, your credit report and score are available to you through any major credit bureaus. Additionally, credit reports are available on several websites that provide information to consumers about monitoring or repairing their credit.
Your Unpaid Account Was Sent To Collection
To protect your credit score, it’s important for you to pay all of your accounts, not just your credit cards and loans. If you fall behind on the payments on your non-credit accounts , the defaulted balance could be sent to a collection agency and included on your credit report. Once a collection shows up on your credit report, it will almost certainly cause a drop in your credit score.
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Why Did My Credit Score Drop Top 10 Causes
John S Kiernan, Managing EditorFeb 8, 2016
Credit scores rise and fall on a regular basis and for many reasons, which means you shouldnt jump to any conclusions about either the cause or the cost of this development. In fact, one of the benefits of having access to free daily credit score updates through WalletHub is that you can more closely track how your score changes over time, thus helping you understand whats normal and whats cause for true concern.
With that being said, the ability to accurately diagnose and treat any ailment that may befall your credit score is still quite important. Below, weve analyzed the 10 biggest reasons why scores have been known to nosedive as well as the actions you can take to stop the descent and take your rating to new heights.
Should You Be Worried
Your first step should be to assess whether or not the situation requires attention or remedy. Credit scores fluctuate thats not unusual. So if your credit scores drop you dont need to panic suggests Gerri Detweiler, business credit expert with Nav. For various, normal reasons, your credit score may fluctuate a few points here and there.
In the case of a larger drop, however, you may have reason to take action. If yours drops dramatically you want to look into it right away. A drop of 15-20 points or more could be due to higher balances reported on one or more of your credit cards or it could indicate fraud or something negative impacting your credit scores adds Detweiler.
When your credit score has taken a dive, its time to take a closer look and possibly take action.
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My Credit Score Dropped For No Reason What Now
Get your full credit picture in one spot
Nav brings your personal and business credit together in one FREE account so you can monitor your full credit picture.
If you dont monitor your credit regularly, you should. For those who have great credit, its just another way to lift your spirits and remind you how awesome you are. If your credit isnt great and youre trying to raise your score, its important to check it to check your progress. Whatever your situation is, you may encounter the stunning situation in which your credit score drops for no reason.
Having a good credit score isnt just a win with prospective in-laws, its also important for your financial goals. People looking to finance a home or car definitely need good credit to reduce the hurt of such a large purchase, and business owners can use credit to grow their business. According to a Nav survey, 42% of small businesses rely exclusively on their owners personal credit scores and another 53% use a combination of personal and business credit scores. Regardless of your goals or demographic, your score can be your lifeline to growth. If your credit score dropped for no reason, what do you do now?
Missed Or Late Payment
Your payment history has an impact in the VantageScore® 3.0 model. Making a late payment or missing a payment on any of your credit accounts, be it a credit card, student loan or mortgage, can be a detriment to your credit score not to mention the fees you’ll endure. Your credit score represents your creditworthiness, or your ability to repay your debt. Missing a payment or making a late payment indicates that you may not be financially responsible.
The best way to avoid making late or missed payments is to set up autopay.
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Your Credit History Has Gotten Shorter
If you have recently closed any other accounts it may have impacted your credit history. Credit history is how long you have had credit being reported in your name. In the world of credit reporting, older is better than younger. This is why it is harder for some young people to build up their scores. Also, you should know that some scoring models only count your open accounts in this calculation.
If you did close those credit cards, they will count in your credit history age for your FICO Score but not your VantageScore.
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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Why Is My Credit Score Low After Getting A Credit Card
When you apply for a credit card, the issuer performs a hard credit check to determine whether you qualify. This can cause your credit score to temporarily drop by up to five points. If you make a large purchase after receiving your new card, it can increase your credit utilization ratio. As a result, your score could drop even further.
Why Your Credit Score Dropped & What To Do About It
Impact:Low
What To Do:Careful planning is the best way to avoid application-related credit-score damage. Doing your research about the types of products you can expect to qualify for, given your credit standing, will enable you to better target your applications, thereby minimizing how many you have to submit.
If youve already fallen victim to this particular pitfall, consistently abiding by the terms of your new account is the best way to quickly overcome the lingering effects of the hard inquiry that led to it if you got approved, that is. If you were denied, reevaluate your options and perhaps apply for less ambitious terms. And if credit building is your top priority, placing a deposit on a secured credit card is a fantastic fallback option.
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Its Never A Good Feeling To See That Your Credit Scores Have Dropped Since You Last Checked But Being Able To Quickly Identify The Cause Can Help You Take The Right Steps To Get Them Back On Track
Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts , or applying for new credit accounts. And dont forget that credit report inaccuracies due to mistakes or identity theft can also cause a dip.
Lets look at the nine main reasons why your credit scores might have dropped, and how you can address each of them.
You Recently Applied For A Mortgage Loan Or New Credit Card
Whenever you apply for a new line of credit, lenders will request a copy of your credit report to determine your creditworthiness. They decide whether to lend to you by viewing characteristics like your payment history, credit usage and the types of accounts you currently hold.
Each time you authorize someone other than yourself, such as a lender, to check your credit history, a hard inquiry is recorded on your credit report and could slightly affect your score for up to two years.
As your credit profile matures, it’s natural to accumulate hard inquiries. But if you apply for too much credit in a short period of time, it can negatively impact your scores and affect the likelihood that lenders will approve you for new credit.
Depending on how many inquiries you already have, a new hard inquiry could cause your score to drop, but potentially only for a short period of time. And any effect on your credit score should disappear in about one year.
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Derogatory Remarks On Your Credit Reports
Since your based on information in your credit reports, negative information can drag your score down. For example, if you have a bankruptcy listed on your reports, it can have a negative effect on your score for a long time. A Chapter 7 bankruptcy remains on your credit report for up to 10 years while a Chapter 13 bankruptcy remains on your report for up to seven years.
Some other examples of derogatory remarks that can lower your credit score include collection accounts and foreclosures. An original debt creditor usually sends your account to collections after failing to collect a debt from you. A foreclosure happens when you default on your mortgage. These negative remarks remain on your credit reports for up to seven years.
Although a derogatory remark can stay on your credit report for up to ten years, its impact lessens over time. Also, practicing good credit habits can help you rebuild your credit faster.
You Closed A Credit Card
There are multiple reasons why closing a credit card can cause your credit scores to drop. First, when you eliminate a credit card, it reduces your available credit. So, if you dont reduce your spending in kind, your credit utilization ratio will go up.
The second reason closing a credit card could hurt your credit scores would be if it hurts the average length of your credit history. The older an account, the more it could affect your average account age when you close it. Before you close your oldest credit accounts, consider whether its absolutely necessary.
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Other Reasons Your Credit Score Could Drop After Paying Off Debt
Although the most common reasons for a score drop after paying off debt are listed above, there are a few other possibilities.
Here are some things to keep in mind if you notice a change in your score after paying off debt:
- You paid off an older collections account: In some cases, making payments on an old collections account can lead to the collection agency changing the date of the debt. Since the debt resurfaces as a newer account on your credit report, it may make a larger impact on your score.
- Not enough time has passed since paying off the debt: The credit bureaus may not get information about your debt payment for 30 days or more, so youll want to check your credit report to see whether the account is marked as paid off.
- Your score drop is unrelated to paying off debt: Although your credit score may drop after paying off debt, that may not be the reason your score dropped. Credit scores are a complicated calculation, and there could be many other reasons for a change in your score. For example, you may have applied for a new line of credit, have a missed payment on a different account, or have inaccurate information on your credit report.
In any case, if you notice a credit score drop, youll want to make sure to get a copy of your credit report. After looking at your report for each of the three credit bureausTransUnion®, Experian® and Equifax®youll have a better idea of the information theyre reporting about you.
You Closed An Account
Closing a credit card account can affect your credit score in a couple ways. If you close one account, maybe one you havent used in a while, but still have a balance on other cards, it can increase your utilization.
Lets say you have two credit cards, both with a $1,000 credit limit. One card has a $500 balance, and the other, a card you never use, has no balance. Your current utilization rate is 25% . Thats below the 30% threshold lenders like you to be at. But if you close the second card that has no balance on it, youll increase your utilization up to 50%! You have to be mindful when closing credit cards for this reason.
Closing a credit card can also impact your score by changing the average age of all your accounts. Lenders like to see that you have accounts with a long history of on-time payments. Generally speaking, the older the average age of your accounts is, the better your score will be. If you close an account thats been open for a long time, it could bring down that average. Think carefully about closing old accounts, especially if you want to limit any negative impact to your score.
Other types of debt can play a role too. Did you recently pay off an installment loan? Those are loans with fixed terms and payment schedules accounts like auto loans, mortgages and student loans. Sometimes, paying off these loans may cause a score to drop slightly, which may seem counterintuitive.
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Other Reasons Your Credit Score May Drop
If you increase the amount of credit you have by over 30%, that may cause a temporary drop in your credit score. The normal credit utilization rate is 30%.
If credit bureaus see that you are using over 30% of your available credit, you may be seen as a risk.
Have you applied for new credit? That may cause an autonomous algorithm to temporarily lower your credit score.
Have you been paying your credit card bills late? Newly implemented FICO scoring metrics can drop your credit score by 20 points for habitually paying your bill late.
Have you fully paid a mortgage, car loan, or personal loan? That can also cause your credit score to dip temporarily.
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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Change In Credit Utilization Rate
Your is another important factor in determining credit scores. VantageScore says that its extremely influential, and FICO® says that it accounts for 30% of your overall score.
If you spent more than usual last month , it will increase your credit utilization rate. How far will your scores drop because of it? The effect will vary, depending on how much your ratio of credit used versus available credit went up. To keep your credit scores steady, the Consumer Financial Protection Bureau, or CFPB, recommends that consumers keep their credit utilization rate below 30%.
Imagine that you have a $10,000 credit limit, of which you typically only use $1,500 . If your spending one month increases to $2,500, your utilization ratio will still be solid overall at 25%. But if your spending suddenly increased to $5,000 , your scores could start showing a decline.