Have you recently checked your credit score and noticed it had gone down? Don't be worried or frustrated. Credit scores fluctuate both up and down on a regular basis. Changes by a couple of points is no big deal. However, a significant drop or a downward trend might be something to check to discover what happened and why. Let's look at a number of potential explanations.
My Credit Score Went Down, Why?
There are many reasons why your credit score dropped. Let's look at some of the most common reasons to help explain why.
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- You missed a payment on one of your credit accounts. Payment history is the most important factor that will affect your credit score. It only takes one late or missed payment to have a negative impact on your credit score. Making payments on-time is critical to ensure your credit score does not drop dramatically. The later your payments, the worse the negative affect on your credit score. Records of late and missed payments stay on your credit report for up to seven years.
It is recommended that you pay the lender as soon as possible, and once the payment has been received, call the lender and ask to be forgiven and the late payment not be reported to the credit bureau. This may or may not work, but it is worth a try.
- Your credit utilization increased. Maxing out a credit card could make your credit score drop. Making a large purchase on your credit card increases your credit utilization ratio. Simply, credit utilization is calculated by dividing your total credit balances by your total credit limits. As a percentage, multiply that number by 100. Credit utilization is a high-impact factor. This factor helps creditors determine how responsibly you use credit.
It is recommended to keep your overall credit utilization below 30%. If your credit utilization is above 30%, there are a couple of things you can do to lower it: 1) you can pay off some of your debt or 2) contact your credit card company and ask for a credit limit increase.
- You closed an old credit account. Closing a credit account will increase your credit utilization ratio. When an old credit account is closed, that total credit amount is removed from your overall credit total. This reduces your credit utilization, which, as we just learned, can negatively impact your credit score. Closing older credit accounts will also shorten your average credit age, which is a credit score factor.
It is recommended to keep open old credit accounts that have been paid in full, as long as you are not tempted to spend against it. This will help maintain your credit utilization and credit history length.
- You applied for a lot of credit. When you apply for credit, lenders will likely make a hard inquiry against your credit before making a lending decision. Hard credit inquiries generally reduce your credit score by a few points. This is not a big concern, but the more credit you apply for, the more your credit score can continue to drop.
It is recommended not to continue to apply for credit. If you can, stop applying for credit for six months and allow your credit score to increase over that period. Also, only apply for credit with lenders you are almost certain to be approved.
- You have experienced a significant negative financial event. A major negative financial event may include, but not limited to:
- Bankruptcy
- Foreclosure
- Tax Lien
- Debt Settlement
These types of financial events are detrimental to your credit score as they stay on your report for up to 7 years. Some of these might also disqualify you from getting certain types of loans.
- You have a mistake on your credit report. Your credit report is used to determine your credit score. If there is incorrect information on your credit report, it can hurt your score. Maybe a lender reported a late payment when it wasn't late.
It is recommended you check your credit report often to check for mistakes. If there is a mistake, gather the necessary documentation to dispute any errors. Disputes can be completed online at each of the national credit bureaus.
Bottom Line
There are a surprising number of factors that could cause your credit score to drop. Each factor has a varying degree of impact on your credit score. Hopefully, you now have a better understanding as to why your credit score dropped and what you can do to start improving your credit score.