Ouch! You check your free annual credit report only to discover that your credit score has dropped. What happened? For the most part, an unexpected drop can be easily resolved, as long as you know the factors that affect your credit score. But it could be a sign of something more serious. That’s why it’s important to monitor your credit report regularly to mitigate any unpleasant surprises. Here are the most common reasons for a credit score that dropped.
Late or Missed Payment
The “better late than never” approach won’t do your credit score any favors. Your payment history accounts for just over a third of your credit score, so if you notice a sudden dip in yours it could be because you forgot a payment. Bear in mind that “late” means 30 days past due, and it can take up to 37 points off, or up to 83 points if your initial score was excellent. Leave it for 60 or 90 days and the score will go down even further. If your lender refers a missed payment to a collections agency, it will go on your credit report for up to seven years.
Top tip: Schedule all your credit card, mortgage, store card and car loan payments, and if you are going to miss a payment, get in touch with your lender ASAP. They may be willing to show some flexibility.
You Applied for a New Line of Credit
Although having a variety of credit lines open is generally good for your credit score, you’ll take a temporary hit each time you open up a new credit card account, store card or loan. That’s because lenders will conduct a hard check on your report prior to approval, which takes a few points off your overall score. Soft checks, on the other hand, won’t affect your score, so it’s important to know the difference between a soft and a hard check.
Top tip: Check whether you prequalify before applying for any new credit. There’s no point in wasting a hard search on a loan or card that you won’t be a match for.
Change to Your Credit Utilization
This one’s common if you’re returning from vacation, getting married or busy making repairs or renovations to your home. After a series of big purchases, your credit card is nudging its limit and your score drops accordingly. Ideally, you want to keep your overall credit utilization below 30%.
Top tip: If you know you’re going to be doing some big spending, ask your lender to increase your credit limit, or use the ScoreMaster® feature which tells you when to pay off your credit card balance before it is reported to the credit bureaus.
Change to Your Credit Limit
Increasing your credit limit will improve your credit score, but if it comes down — either at your request or through your lender’s decision — you’ll see a slight drop in your score. That may seem like a paradox, but lenders prefer to see responsible utilization of a substantial credit limit rather than sporadic use of a small credit limit.
Top tip: Keep your limits high and your payments on time. You can soften the burden by paying off any spending before the interest period kicks in.
Closing Cards or Loans
You’ve finally paid off your credit card balance and closed your account, but instead of a pat on the back from your credit reporting agency you see a drop in your score. Sound fair? Bear in mind that from the perspective of your next lender, you’ve relaxed your borrowing muscle. You only really need to get rid of your cards and close credit if you’re consistently borrowing more than you can repay and paying too much in interest repayments.
Top tip: Keep your accounts open to build your credit history. You don’t have to use them regularly, but it’s a good idea to make a few minor payments and repayments once or twice a year to keep them active.
Inaccurate Information — or Worse
According to one recent investigation, more than a third of Americans found errors in their credit report. It happens, and you shouldn’t wait until your next free annual report to spot the mistakes. Typical errors include repaid loans that are marked as delinquent, wrong name or address, and account balances that are out of date.
The Risk of Identity Theft
If someone has compromised your personal details and used the information to open up credit lines in your name, the effects on your credit score could be devastating. Fraudsters are relentless and creative, so make sure you’re always one step ahead by monitoring your report regularly.
Top tip: Resist the temptation to take those Facebook personality tests that ask you for your mother’s maiden name or anything else that might reveal your passwords. Only shop online from secure encrypted sites, and check your credit score and report regularly for signs of suspicious activity.
Lender Activity
A drop in your credit score doesn’t imply that you’ve done something wrong. It’s just an indication of a trend in borrowing. Sometimes lenders will close your account because of inactivity or arbitrarily reduce your credit limit for no apparent reason. It happened to 70 million Americans in 2020. Other than keeping accounts nominally active, there is not much you can do.
Top tip: Communicate with your lenders as much as possible.
What’s Next?
Use ScoreMaster and there are no more nasty surprises. Instead, you’re empowered by insight, with the information you need to make informed decisions that will help you achieve your best possible score. See the full list of features here.
References:
CNBC – 5 Reasons Your Credit Score Could Suddenly Drop
CNBC – A Third of Americans Found Errors on Their Credit Reports. Here’s How To Fix Those Mistakes