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Have you ever checked your credit scores only to notice a sudden drop you weren't expecting? Don't be alarmed. Credit scores change all the time, and if yours went down, there are a number of potential explanations.
Since credit scores are not static numbers, many factors can cause them to fluctuate. You don't have to default on a loan for your score to drop: even positive things like getting approved for a new credit card can negatively affect your score.
Why Your Credit Scores May Have Dropped
If you've noticed a drop in your credit scores, some common reasons might explain why:
1. You Have Late or Missed Payments
Your payment history is the most important part of your credit score, accounting for 35% of your FICO® Score☉ (the most widely used credit scoring model). Even one late or missed payment can have a negative impact on your credit scores, so it's important to make sure you make all your payments on time.
If you are more than 30 days past due on a payment, credit issuers will report the delinquency to at least one of the three major credit bureaus, likely resulting in a drop in your score. If your payments become 60 or 90 days past due, the effect on your score will be even greater.
If these delinquencies are not paid, the credit issuer may send your debt to a collection agency, and a record of your collection account will be recorded on your credit report. Records of your late and missed payments are stored in your credit file for seven years, so be sure to make all your payments on time to avoid any damage to your score.
2. You Recently Applied for a Mortgage, Loan or New Credit Card
Whenever you apply for a new line of credit, lenders will request a copy of your credit history to determine your creditworthiness. Each time you authorize someone other than yourself, such as a lender, to check your credit history, a hard inquiry is recorded on your credit report and has the potential to affect your score for up to two years.
As your credit profile matures, it is natural to accumulate a few hard inquiries. But if you apply for too much credit in a short period of time, it can impact your scores and change how lenders consider you for new credit.
Depending on how many inquiries you already have, a new hard inquiry could cause your score to drop for a short period of time. As long as you don't continue to apply for new credit, the effect on your credit score should disappear in about one year.
3. Your Credit Utilization Has Increased
Maxing out your credit card to buy a fancy TV could easily make your credit score drop. Depending on your card's credit limit, making a large purchase can increase your credit utilization ratio, the second most important factor in calculating your credit scores. An increased credit utilization ratio can indicate to lenders that you are overextended and not in a place to take on new debt.
Your credit utilization ratio is calculated by adding all your credit card balances at any given time and dividing that by your total revolving credit limit. For example, if you typically charge about $2,000 each month, and your total credit limit across all your cards is $10,000, your utilization ratio is 20%.
You should aim to keep your credit utilization ratio below 30%, and for the best scores, below 10%. So, if your total credit limit is $10,000, keep your balances below $3,000.
4. One of Your Credit Limits Was Lowered
Similar to maxing out your credit cards, having your credit limit lowered can increase your credit utilization ratio and negatively affect your credit scores. Imagine, as in the example above, your total credit limit was $10,000 and you carried a balance of $3,000—your utilization ratio would be 30%. If your limit was lowered to $6,000, but your balance remained the same, your utilization ratio would change to 50%. This could cause your credit score to drop.
Regardless of whether your credit limits are shrinking or your balances are increasing, keeping an eye on your credit utilization ratio will help you better understand your fluctuating credit score.
5. You Closed a Credit Card
If you're thinking about closing a credit card you don't use, you may want to think twice. Closing a credit card account will not only increase your utilization ratio, it may also reduce the length of your credit history—both of which can impact your FICO® Score.
When you close a credit card, that credit limit is removed from your overall utilization ratio, which as mentioned, 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 (meaning you made all your payments on time), it could remain on your credit report for up to 10 years, reducing the effect on your credit scores.
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.
6. 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 in your credit report is 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, you should dispute the information with all three credit bureaus as soon as possible.
7. You've Experienced a Major Event Such as a Foreclosure or Bankruptcy
The late payments that often lead up to a bankruptcy or foreclosure harm your credit scores, but the events themselves can make matters worse.
Bankruptcy is a legal process initiated by borrowers looking to get relief from debt payments and is the most severely harmful single event to credit. Foreclosure is when your mortgage lender lender takes possession of your house, typically following four consecutive months of missed payments, and is second only to bankruptcy in terms of credit harm.
In addition to damaging your credit score, either event can disqualify you from certain types of borrowing in the future. A mortgage lender may be unlikely to take you on as a borrower if you have a foreclosure in your past, for instance.
What Is a Good or Bad Credit Score?
Maintaining a good credit score can have a variety of benefits, including saving you significant money over time. Good scores will help you qualify for a variety of credit products at preferred interest rates. Bad scores, on the other hand, may prevent you from qualifying for certain types of credit or may result in credit products at higher interest rates.
Credit scores are divided into different scoring ranges. Many scoring models, including the FICO® Score, use a range between 300 and 850. In that model, scores above 800 are considered excellent, while anything above 700 or above is typically considered good. Scores below 669 are considered to be fair or poor. Most people have a credit score between 600 and 750. In 2017, the average FICO® Score in the U.S. was 704.
Ways to Improve Your Credit Scores
If you're looking to improve your credit scores, here are a few tips that might help:
- Pay your bills on time. This is one of the most crucial steps to getting and keeping a good credit score. If you tend to have trouble remembering, set up automatic payments so you won't miss a bill.
- Minimize overall debt. This keeps your payments manageable and your ongoing utilization ratio low.
- Avoid overextending yourself. If you can avoid it, don't lean on credit for things you cannot afford.
- Don't apply 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. Don't go overboard using credit.
- Activate Experian Boost™† . The free service adds bills you're already paying, such as cellphone and utility bills, to your credit report and can increase FICO® Scores based on your Experian credit file.
Improving or building your credit scores can take time—and there are no shortcuts! If you want to improve your score, start by requesting a free copy of your credit report from Experian. To be alerted to the changes in your credit report or scores, sign up for Experian credit monitoring. The free service will provide you with daily alerts regarding changes such as your account balances or credit scores, and can even alert you to potential fraud.
Want to instantly increase your credit score? Experian Boost™ helps by giving you credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your score.
This service is completely free and can boost your credit scores fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.