You Missed A Credit Card Payment
Because your payment history is the most important factor that determines your credit score , missing a credit card payment will have an immediate negative effect on your score. Needless to say, lenders and issuers care a lot about whether you’ve paid your past credit accounts on time because they indicate your risk.
According to FICO data, a 30-day missed payment can drop a fair credit score anywhere from 17 to 37 points and a very good or excellent credit score to drop 63 to 83 points. But a longer, 90-day missed payment drops the same fair score 27 to 47 points and drops the excellent score as much as 113 to 133 points. In other words, the higher your credit score, the greater the negative effect will be.
How quickly your score bounces back after a missed payment varies depending on your credit history and your payment behavior after you miss a payment. If you jump back on track quickly after, it’s likely your score will start improving along with your good payment history. A history of on-time payments is vital to a good credit score, and it’s even better if you can pay them in full.
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 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.
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Limit How Often You Apply For New Accounts
While you may need to open accounts to build your credit file, you generally want to limit how often you submit credit applications. Each application can lead to a hard inquiry, which may hurt your scores a little, but inquiries can add up and have a compounding effect on your credit scores. Opening a new account will also decrease your average age of accounts, and that could also hurt your scores.
Inquiries and the average age of your accounts are minor scoring factors, but you still want to be cautious about how many applications you submit. One exception is when you’re rate shopping for certain types of loans, such as an auto loan or mortgage. Credit scoring models recognize that rate shopping isn’t risky behavior and may ignore some inquiries if they occur within the span of a couple of weeks.
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!
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Pay Down Revolving Account Balances
Even if you’re not behind on your bills, having a high balance on revolving credit accounts can lead to a high and hurt your scores. Revolving accounts include credit cards and lines of credit, and maintaining a low balance on them relative to their credit limits can help you improve your scores. Those with the highest credit scores tend to keep their credit utilization ratio in the low single digits.
Why Did My Credit Score Drop 9 Possible Reasons
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When your credit score takes an unexpected turn downward, you may feel angry or frustrated. Credit scores do fluctuate, and a couple of points up or down is not a big deal but a downward trend or a big drop is.
Heres a list of things that might be behind your credit score drop, and tips for fixing them:
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You Initiated A Hard Inquiry
There are two different types of inquirieshard and soft. A soft inquiry or soft credit check generally occurs when an individual or company checks your credit history for a background check. A hard inquiry or hard credit check generally occurs when a lender, credit card issuer or other financial institution checks your credit history when making a lending decision.
A soft inquiry will have no affect on your credit score and will be reported as a soft credit check. On the other hand, hard inquiries will temporarily negatively affect your credit score.
Some of the most common examples of hard inquiries include:
- Mortgage applications
- Lawsuit
- Tax lien
Derogatory marks are generally harder to get off your credit report. While hard inquiries may take two years, a derogatory mark will usually remain on your report for seven to potentially 10 years. That means your credit score may be negatively affected by a derogatory mark for nearly a decade. However, as time goes on, the derogatory mark has significantly less effect on your credit score.
Hard Inquiries Vs Soft Inquiries
Hard Credit Inquiries
When youre applying for a new credit card or loan, the creditor will likely perform a hard inquiry or hard pull to check your credit score. This type of inquiry can slightly lower your credit score.
Its important to shop around for the right credit card for your lifestyle with rewards and travel points, credit cards can be extremely beneficial if used responsibly. However, applying for multiple credit cards at once can be counterintuitive to your credit-building efforts, thanks to hard inquiries. If youre applying for multiple lines of credit, creditors may interpret this as a sign of financial hardship and consider you a risk to approve.
Before applying for a credit card, check the pre-qualifying information to see if youre a likely candidate for approval. With a little research, and by running a free credit score check, you should be able to get a good idea of whether or not you qualify for a particular card.
Another important distinction to make about hard inquiries is that they will always require your consent. If you believe there was an unauthorized hard credit pull that has lowered your score, be sure to dispute the error with the credit bureau.
Soft Credit Inquiries
The following credit checks are typically considered soft inquiries:
- Checking your own credit score
- Employment credit checks
- Most property management credit checks
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Other Reasons Why Your Credit Score May Have Dropped
While paying off credit cards often leads to a score increase, other credit activity could counteract those gains, or result in a drop in your score while you’re waiting for the credit card issuer to report your paid-off debt to the credit bureaus.
For example, a late or missed payment on another credit card or loan will have a big impact on your score. That’s because payment history is the most important , accounting for 35% of your FICO® Score. The delinquency’s effect on your score increases as time goes on, so a payment that’s 90 days late has a greater impact than one that’s 30 days late.
Applications for new credit, such as a private student loan, mortgage, credit card or car loan, can also cause a brief dip in your score. These applications create hard inquiries on your credit report, which means a lender has requested access to your credit file to evaluate your creditworthiness. Hard inquiries typically lower your scores less than five points and can stay on your report for two years.
Youve Checked Your Credit Score Too Many Times
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While Equifax and TransUnion are the two credit bureaus for Canadian consumers, the score that lenders typically check isnt from either of those, but rather from FICO, a US-based data provider.
When you apply for any kind of loan, the lender will pull your credit score with a hard check to find your FICO score . This could actually drop your credit score by up to 5 points according to FICO. So if youve been shopping for a mortgage or a car loan recently, this couldve caused a drop in your credit score.
Related: Does Checking Your Credit Score Hurt Your Credit?
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Why Did My Credit Score Drop How To Fix The Sudden Change
When FICO levels fall, consumers have difficulty taking out more loans. The lower the score the lower the odds of your next application being accepted. It may be rejected, or you will be charged more interest. If you notice your total drop, take action quickly.
Do you monitor your score? Every year, you are entitled to a free copy of your records from each of the three major bureaus in the USA. In addition, you may use apps to keep track of the indicator. Once you run business credit checks or personal ones, you need to be aware of why they may drop.
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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.
You Closed A Credit Card Account
It may seem smart to close a credit card account you arent using. Keeping it open seems like it increases the risk of falling into credit card debt, or having the card stolen. But the average age of your credit or the period of time youve had your accounts is an important factor in weighing your credit score. If you close an account youve had open for a long time, it will reduce your average credit age. Only close an account if you think its necessary to do so or if you know you have enough credit history where it shouldnt be a problem.
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How To Handle Big Changes In Credit
Before paying off an auto loan or making some other big change to your credit, keep an eye on your credit report and credit score, Griffin said.
“Make sure your score is in good shape,” he said. That way, any dip will have less impact.
Hereâs our breakdown of how to get a high credit score.
âIn that case the impact is really nonexistent,â Griffin said. âIt wonât change your ability to qualify for credit.â
How can you maintain a solid score? The most important factors are:
Keep making all your payments on time. This is the biggest part of a good score. Keep the amount of credit you use low relative to the amount you have available. This is known as your credit utilization ratio, and the lower it is, the better.Avoid opening new accounts unless you need them.
And just in case, space out any major credit moves. If you do pay off a loan, consider waiting a month or two before applying for new debt to allow your score to stabilize.
Above all, celebrate the win. Paying off my auto loan may have led to a dip in credit, but I can fit a few more takeout dinners into my budget every month, which is basically my most important financial goal.
Image: GettyImages / Arslan Ozgur Sukan
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Should You Worry About Your Credit Score Dropping
Changes in your credit score are completely normal, so theres no need to worry about small fluctuations! That being said, its good to check your credit report at least once a month so you can monitor these changes when they occur.
You may want to take note of large changes in your score as they could be an indication that something bigger is happening for example, if you have unauthorized accounts opened in your name, or youve been a victim of identity theft.
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You Have A High Balance
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If you carry a high balance on your credit card, this could be hurting your credit score since credit utilization is 30% of your credit score.
In our Ultimate Guide to Credit Scores, we explain it like this: Credit utilization refers to the amount of credit that you are using relative to the amount that is allotted to you. For instance, if you have a credit card with a $1,000 credit limit, and you have a balance of $200 on that card, its a 20% credit utilization.
It has been speculated that maxing out your credit cards can drop your credit score by up to 50 points.
Some Accounts Dont Appear On Your Credit Report
Some lenders dont report to the bureau every month. So, look for payments that should be there but are not. Remember, it costs the lender money to tell the Big Three youve paid a bill. Auto lenders may be quick to repossess a car if you miss a payment but may find little advantage in reporting a paid-off loan instantly. So, it may take a three-month period for that good news to get published.
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You Closed A Credit Card
Think twice before closing a credit card you don’t use. Closing a credit card account will not only increase your utilization ratio, it may also reduce the length of your credit historyboth of which can impact your credit score.
When you cancel a credit card account, that credit limit is removed from your overall utilization ratio, which has the potential to lower your scores. Closing a credit card account you have had for some time can also shorten your average credit age, and that will factor into your credit score.
The length of your credit history counts for 15% of your FICO® Score, so a longer history is better for your scores. Keep in mind, however, that if your account is closed in good standing , it could remain on your credit report for up to 10 years.
Unless the credit card has a high annual fee that you cannot afford or it tempts you to spend more than you should, it doesn’t hurt to keep the account open to maintain your credit limit and length of credit history.
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.
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