Your credit score is an important number that can have a major impact on your life. Although only three digits, potential lenders can tell you a lot about your creditworthiness. You may notice that regular fiscal monitoring will lower your credit score. If that happens unexpectedly, you might ask, “Why did my credit score drop?”
In this article, we will explain some of the reasons behind the decline in your credit score. It also highlights how to get your credit score back on the correct trajectory.
Why did my credit score drop? 11 common factors
Your credit score reflects your credit report. Factors that affect your credit score can be reduced or constructed based on your choices, credit history length, payment history, and more.
So, let’s take a look at 11 common reasons why my credit score is reduced.
1. Too many hard credit inquiries
When applying for a new loan, you may be paying attention to your credit score. You may notice a sudden drop while applying for a new loan.
In this case, the decline in your credit score could be the result of too many hard credit inquiries. Once you apply for credit, the lender and credit card issuer will draw your full credit report to determine your creditworthiness.
Credit enquiries play a small role in your overall credit score, but can be a reason for the recent decline.
If you applied for several new credit lines in the past month, this is the most likely reason for the decline. If you’re worried that checking your credit score will reduce it, know that it won’t be considered a difficult inquiry. You only need to worry about hard enquiries when applying for a new loan or credit line.
2. I missed payments without delay
Lack of payments can damage your credit report and reduce your credit score. That’s especially true if you consistently make late payments. If you miss your payments completely, your credit score may also drop.
Lenders prefer borrowers who can make regular, on-time payments. A low credit score may indicate inconsistent payments to potential lenders about making on-time payments.
3. Expanding balance
The balance of revolving credit lines (such as credit cards) may change monthly.
For example, if you have credit card debt, you may see an increase in your non-complete balance in your credit card account each month.
An increase in the amount of debt rotating leads to increased credit card usage. If you have a $10,000 credit limit on your $5,000 balance, you have a 50% usage rate.
In the FICO scoring model, approximately 30% of the FICO score comes from the amount of debt. Knowing this, I recommend keeping your credit card and other spin balance as low as possible. Many experts recommend keeping your credit usage below 30% to prevent a negative impact on your score.
4. Why did my credit score drop after closing my old account??
You may think it’s the best way to get out of debt, so closing your account is appealing, but it can lead to a decline in your credit score.
FICO Credit Score Factor for the length of your credit history when calculating your score. Older accounts are considered positive traits of your credit history.
After all, if you manage your credit responsibly for a long period of time, your lender wants to work with you. Closing an older account reduces the average age of your credit account and also drags your credit score.
5. Credit Report Bankruptcy
Foreclosures and bankruptcies can have a significant impact on your credit score. A large dip in your credit score can result from a recent foreclosure or bankruptcy.
In most cases, this kind of mark on credit reports has a major negative effect on your score. Unfortunately, this effect can affect your credit score for years.
6. Personal information theft
Why did my credit score drop even though nothing has changed?
This question is asked a lot. After all, why does your score drop when nothing has changed in your financial situation? One reason is identity theft.
Being a victim of identity theft is one of the worst reasons why your credit score will fall. If this happens, people can use your identity to apply for a loan such as a credit card, opening utility bills in your name, and even stealing tax refunds!
So I’m the reason I suggest regularly monitoring your credits. That way you can make sure everything above is legal. If someone is taking on debt and doesn’t pay the bill in your name, it can be harmful to your finances.
7. Credit Report Error
There is another answer to the question, “Why did my credit score drop when nothing changed?” It’s just a mistake in your credit report.
It is possible that the creditor has made an inaccurate report to the credit department (Equifax, Transunion, and Experian). Errors affect the score.
Once you have identified the error, contact the reporting company to challenge the error in your credit report. You can also contact the Credit Bureau to notify you of any errors.
8. Credit limits have been reduced
Another reason your score can drop is when your credit limit is reduced due to lack of use, or when your credit limit is reduced due to credit changes. It can reduce your overall debt to credit ratio and it can affect your score.
You can contact the company and ask why they reduce your limits and restore if possible. Also, paying off your balance will improve your score, so try to work on a debt reduction strategy and pay your card back each month.
9. Repayment of the loan
“I paid off my loan so why did my credit score drop?”
Paying off your loan is a good thing, but in the end, you’re out of debt! -It can have a negative impact on your credit score. There are several reasons for this:
- Reduced credit mix.
- I closed the last account for a certain type of credit.
Paying off your loan will reduce the amount of debt you owe and the type of credit account you have. Some of the credit scores in most scoring models include the credit mix and the different types of credits you have.
Having an manageable combination of car loans, student loans, mortgage payments and credit cards can help you show that you are a responsible borrower, regardless of the type of credit you are offered. When you pay off a loan like a car loan, you are removing a kind of credit from your credit report.
10. Unpaid balance charge off
If they simply stop paying the debt, the creditor may amortize the debt as irrecoverable, known as a claim. That doesn’t mean you don’t have to pay your debts, but you may pay a debt collection agency on behalf of your former lender.
Charging your credit report can have a negative impact. You may see a charge on your credit report for the next few years. This makes it even more difficult to improve your credit score and secure a new credit account.
Fortunately, you may be able to remove the chargeoff from your credit report.
11. Debt Settlement
A debt settlement is negotiating with your creditor to pay off your debt for less than you owe. While this may sound like a good way to reduce your debt, your credit score will feel the impact of solving your debt.
When you settle your debt, you and your creditors agree that you never have the funds to pay all the amounts you have outstanding. Creditors lose their debts in the hopes of retrieving some of the money they ow. This agreement will be reported to the Credit Bureau, which will be added to the credit report.
Debt settlement is generally preferred over bankruptcy, but can cause similar issues with your credit score. According to Experian, debt tends to remain on credit reports for seven years. When a new lender sees you have settled your debt, they may be wary of lending you money.
Expert Tip: Don’t panic if your credit score changes slightly
Credit scoring models like FICO use mathematical formulas to calculate credit scores. Small changes to these formulas can cause slight variations in your credit score.
If you find that your score has risen or fall slightly, it is usually not the cause of concern. It is best to focus on paying on time, paying off your debts and looking at your credit score for major changes.
Why did my credit score drop even though nothing had changed? How can I know?
The best place to start is to monitor your credit score regularly. There are two favorite resources to monitor your credit report for free.
Credit Karma
Credit Karma is a user-friendly site that sends useful alerts about your credit score. If there is a drop, you can act quickly.
Credit Karma allows you to access your credit score and credit report from two of the three major credit offices.
The report is updated weekly, so you can always view your credit report.
AnnualCredItReport.com
With the government website AntualCreditReport.com, you can check your credit reports each week to ensure that all information is accurate.
Both options are trusted and are a convenient way to monitor your credit score. Consider these options and decide which one is best for you.
Four Ways to Increase Your Credit Score After the drop
If you notice a recent decline in your VantagesCore or FICO credit score, rebuilding your credits can be your top priority. Luckily, it’s completely possible to rebuild your credits.
As you improve your credit score, you can unlock better loan terms and rates for large purchases such as down payments and cars. Better loan terms can result in thousands of dollars savings over the lifetime of your loan.
You may be surprised at how quickly your score can rebound if you implement the following strategies: Let’s take a closer look at the best ways to start improving your credit score.
1. Repay the revolving debt balance
Revolving obligations are associated with easily accessible credit lines, such as credit cards and home equity lines. Each month, this revolving debt can potentially increase or decrease the amount.
These loans differ from installment loans, such as scheduled repayment timelines and personal loans with monthly payments. If you allow your credit card balance to grow, it can hurt your credit score and it may drop.
The solution is to pay off your credit card quickly. It can be difficult to get rid of your debt, but it is completely possible to pay off your debt.
Consider using the snowman method to start your debt repayment journey. Along the way, you may need to consider starting a side hustle to increase your income and maintain your budget.
As you begin to pay off your debts, you celebrate small victory. Every dollar you pay is an advancement in your journey. It may not be a one-night path, but every step you take will bring you closer to something you don’t have debt.
Additionally, you may be able to increase your credit score in the process.
2. Pay on time
Lenders value borrowers who are able to consistently pay off their debts on time.
In fact, paying on time is one of the fastest ways to improve your credit score. One way to consistently make payments on time is to automate your finances.
Automation is key to learning how to manage your money efficiently. No more worrying about remembering to pay the bill. Instead, all your debt payments will be made on time for you without any headaches.
3. Credit Builder Loan
Credit Builder Loans are a surefire way to improve your credit score if you can make payments on time. When you take away your credit builder loan, the amount of the loan will be held in your bank account. Through the loan, you pay on time what the lender reports to the credit department.
Payments made along the way include both principal and interest. At the end of the loan term, you will receive the money your lender holds in your account. You can learn how to build a credit score and save money at the same time.
4. Take a free course on how to build good credits
A good credit score can save you thousands of dollars, so taking action is important. If you want to learn more about the inside and outside of building credits, the free “good credit” course is a great resource.
Learn more about the factors that affect your credit score.
Additionally, you can learn more about the specific action steps you can take to improve your credit score.
How long does your credit score last?
The amount of time that credits continue to fall depends heavily on what it was dropped in the first place. For example, if you use a large amount of credit card restrictions or make some strict inquiries about your credit report, your score will often only temporarily drop.
On the other hand, without some payments or debt settlement, your score can drop significantly. Therefore, backups take time.
The best thing you can do if your credit score drops (after checking for fraud) is to keep paying on time and work to reduce the amount of credit you use.
Why is my credit score low even though I don’t have any debt?
Even if you’re not in debt, there are many reasons why your score may be low. And your lack of debt may be part of the cause. Creditors generally like to look at different credit types when they look at their credit scores.
For example, people with a good credit mix may own a car loan, a mortgage or credit card.
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It’s possible to rebuild your credits!
A great credit score will allow you to unlock better loan terms for large purchases of your life. Better loan terms will potentially save you thousands of dollars over the lifetime of these major purchases, such as your home.
Remember, at the end of the day, it’s all about using your credits wisely. For more great financial tips on improving your credit, dumping debt, saving money, and building wealth, go along with your Clever Girls Podcast and YouTube channel!