Why Did My Credit Scores Drop Common And Uncommon Reasons
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Yet unlike the numbers on your bathroom scale, when you discover that your credit scores dropped, its usually cause for alarm.
You Missed A Payment On One Of Your Credit Accounts
Mistakes happen, but a pattern of late or missed payments may cause a lender to take action and report your error to the major credit bureaus . Whether you couldnât pay the bill because of hardship or you completely forgot the due date, banks need to see that youâre trying to pay.
âSolution: Once you realize this error, make the payment ASAP. After theyâve received your payment, call and ask if theyâll forgive you this one time. Many lenders are understanding. If itâs the first time this has happened, they could let it go and not report it. Remember, however, that thereâs a difference between a payment late by a few days and something thatâs very late . Banks donât usually dismiss the more obvious errors.
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.
Read Also: When Do Credit Cards Report Late Payments
Use Free Services To Understand Whats Helping And Hurting Your Score
The second thing you can do is use services that provide what are called educational scores. These scores are not calculated using the FICO formula, but by using a variety of other credit scoring formulas. These services do an excellent job of educating you about your credit score. You get pertinent information such as whats hurting your score and whats helping your credit score so you can figure out whats going on and what you need to improve.
Three services I can recommend are , Experian;and Quizzle. Theyre all free. You dont need a credit card. Ive used them all and theyre very easy to use. You may pick one or you could use all three of them if you want to compare them.
True, its not your FICO;Score and people criticize them for that, which is fine. I actually did a comparison and I found that theyre generally pretty accurate. More importantly, the services do a good job of helping you improve your score.
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You Applied For A New Credit Card
Card issuers pull your credit report when you apply for a new credit card because they want to see how much of a risk you pose before lending you a line of credit. This credit check is called a;hard inquiry, or “hard pull,” and temporarily lowers your credit score a few points. Hard inquiries remain on your credit report for two years, but FICO only considers inquiries from the last 12 months when calculating your credit score.
But hard inquiries on your credit report aren’t necessarily bad when they happen in moderation. After all, applying for credit cards is a great first step in building credit. When you use credit cards correctly by charging purchases and paying them off in full by the due date they can help increase your credit score. If you’re looking to build credit, consider the;Petal® 2 “Cash Back, No Fees” Visa® Credit Card, which offers cash back, or the;Capital One® Platinum Credit Card that is designed for average credit applicants.
To reduce the number of unnecessary hard pulls on your credit report, check if you qualify for a new card by using issuers’;preapproval or prequalification offers. These won’t guarantee that you’ll be approved for the specific credit card, but they’ll give you a good idea.
When it comes to actually applying for new credit products, be sure to spread out your credit card applications over time. Only apply for a new credit card every three months, and maybe wait even longer between applications if you have a lower credit score.
There Is Inaccurate Information On Your Credit Report
Regularly checking your credit reports is one of the best ways to ensure no inaccurate information shows up in your file. Although it’s rare, mistakes happen, and it is possible that incorrect information on your credit reportsuch as inaccurate personal data or payment historyis causing your scores to drop.
If something in your report is inaccurate, it could be a result of a lender accidentally reporting the wrong information. It could also be a sign that you have fallen victim to identity fraud. If you see something you believe is inaccurate, dispute the information with all three credit bureaus as soon as possible. But keep in mind, some pieces of data can’t be disputed, like credit inquiries, accurate birth dates and credit scores.
Also Check: What Credit Report Does Paypal Pull
New Credit Inquiries Can Raise Red Flags For Lenders
What creditors like to see are consumers who pay their bills on time and as agreed. They also like to see low credit usage relative to your credit limits . These two areas payment history and credit utilization make up 65 percent of a persons credit score.
The remaining 35 percent is length of credit history at 15 percent, at 10 percent, and finally new credit at 10 percent. Why should the 10 percent from new credit and inquiries make that much difference to a would-be creditor? Ill tell you.
Its because a hard inquiry injects an amount of uncertainty in your file. Why did you apply for new credit? Are you going to max out the new credit line? Is the new credit a sign of instability? These are all potential red flags for a lender.
When the credit scoring elves at FICO and VantageScore look at this new activity on your file their historical algorithms tell them that a certain percentage of people really do max out their new lines and some even go into default in a year or two.;So, until you demonstrate that you are a still wise credit user, your score declines. This drop is more pronounced in a file with less credit history.
In my first book, Credit Repair Kit for Dummies, I point out that one inquiry may have no effect on your score at all and, in general, only takes five points or less off a mature score. But lots of inquiries can signal greater risk to the creditors.
How Can You Improve Your Credit Score
You can improve your credit score by performing the following actions:
- Pay all of your credit cards and loans on time
- Pay all of your other bills on time
- Dont apply for too many credit cards or loan within a short period of time
- Keep old accounts open
- Reduce the balances on your credit cards and loans
- Check your credit report & dispute any inaccuracies that you find
Recommended Reading: Does Having More Credit Cards Help Your Credit Score
How Are Credit Scores Calculated 5 Factors Credit Bureaus Look At
Its also really important to understand how your credit score is calculated. That way, should you want to address any drops in your credit score, you can identify the key issues impacting your credit score the most and work to resolve them.
There are five main factors credit bureaus consider when determining your credit score. They are :
When Its Ok To Let Your Good Credit Score Drop
If youve worked hard to achieve and maintain a good credit score, it can be upsetting to see it drop. But life happens, and sometimes how you react is going to blow back and affect your credit score, says credit expert John Ulzheimer. People lose jobs, cars break down and pipes leak. Credit may be your safety net.
Painful as it may be, there are times when taking actions that hurt your score are prudent for your overall finances.
WHEN YOU HAVE AN EMERGENCY EXPENSE
If you have a big, unexpected expense that exceeds your emergency savings, using your credit cards to cover it can be a decent option.
You may have some temporary score damage from having a high balance on your card for a while. Its generally best to keep balances below 30% of your credit limit, and of course, paying in full every month is ideal. But the damage from a high balance should fade as new, lower balances are reported to credit bureaus.
Dont beat yourself up for not having saved enough. Emergencies dont necessarily match up with when youve saved enough, nor do they come one at a time. Cary Siegel, the author of Why Didnt They Teach Me This in School?, strongly recommends developing a budget and building an ample emergency fund so youre protected in the future.
WHEN YOURE STRUGGLING TO COVER ESSENTIAL EXPENSES
WHEN MONEY IS ON THE WAY
WHEN STARTING OR INVESTING IN A BUSINESS
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There Are Errors On Your Credit Report
Your creditors can and do make mistakes. Credit bureaus also make mistakes. Going back to point one, make sure that everything on your credit report is true. If its not, take it up with the creditor it came from or dispute it with the credit bureau. Both Equifax and TransUnion have dispute processes that are simple to follow on their websites. Correcting these sorts of errors can make credit building a lot easier.
A Spike In How Much Credit You Use
Your total available credit limit is the amount youâre able to borrow across your credit accounts. .
With your credit limit, itâs all about balance. Using too little credit could harm your score, as youâre not able to prove to lenders how you manage credit. However, using too much of your credit limit could suggest to lenders that you’d struggle to repay any new debt. This can cause your credit score to drop.
Itâs recommended that you try to keep your below 30% of your total credit limit.
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Why Did My Credit Score Just Drop 6 Common Reasons
Your three-digit credit score can be the difference between being approved for a new financial product with strong terms versus being stuck with sky-high interest rates or worse, denied altogether. So it can be incredibly frustrating when you think youre doing well financially, only to find that your score has dropped.
that helps lenders and often landlords determine how much risk you pose as a borrower or renter. The better your credit score, the lower your interest rates and larger your credit limits will be, while the opposite is true the lower your score is. But credit scores also frequently change, and sometimes not for any obvious reason.
Scores fluctuate all the time depending on how the information in your credit history is evolving and changing, says Rod Griffin, senior director of consumer education and advocacy at Experian.
Here are the six most common problems that can lower your credit score, according to Griffin:
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.
Ways To Improve Your Credit Scores
If you’re looking to improve your credit scores, these tips can help.
- Pay your bills on time. This is one of the most crucial steps to getting and keeping a good credit score. The best way to pay on time is to set up automatic payments so you won’t miss a bill. But make sure you have enough money in the connected bank account to avoid an overdraft.
- Minimize overall debt. If possible, don’t lean on credit to buy items you’re not able to pay for in cash, or that you can’t pay off by the end of the month. This keeps your payments manageable and your ongoing credit utilization ratio low. Your goal should be to bring your credit card balance to $0 at month’s end.
- Monitor your credit regularly. There are many ways to check your credit score for free, including via Experian. Doing so can help you identify dips in your score quickly and course-correct if necessary. Free credit monitoring from Experian can help you keep tabs on both your FICO® Score and credit report, and keep you updated when there are any changes to your credit report.
- Avoid applying for unnecessary credit cards. Not only do some cards have pricey annual fees, but an abundance of cards might result in more spending than you can handle.
- Practice responsible spending habits. Setting up a budgeteven a general one that categorizes your spending into a few overall buckets and doesn’t require too much upkeepcan help you spend within your means over the long term.
Why Do Credit Scores Fluctuate
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Its completely normal for your credit scores to fluctuate
Information in your credit reports is updated as it is reported to credit bureaus
The passage of time can also cause changes in credit scores
If youre tracking your credit scores over time, you may notice the three-digit numbers may change, even if the credit score is generated by the same credit bureau or company.
Its completely normal for credit scores to fluctuate. But why does this happen?
Your credit scores are a snapshot in time that changes based on your credit behaviors and the information in your credit reports, which is updated;regularly. Credit scores are calculated based on;information in your credit reports. That information is updated;as new data is reported to credit bureaus by lenders, collection agencies, or other sources.
That data could include balance changes, the opening of new accounts, payments on existing accounts, or closed accounts falling off your credit report after a period of time has expired. If you check one credit score;in January and then again in March,; for instance, the credit score may have changed based on changes in account activity reported to the three nationwide credit bureaus — Equifax, Experian and TransUnion — during that time.;
Differences among credit bureaus
While a credit score from one of the three nationwide; may rise and fall, you may also see differences in credit scores furnished by the other two credit bureaus.
Why Your Credit Score Dropped & What To Do About It
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.