Many factors can cause your credit score to drop, such as a late payment, an increase in credit card applications or even a mistake on your credit report. While losing a few points is no big deal, a big decrease could hurt your future options for getting financing. Show
Understanding the basics of your credit score can help you keep it in tip-top shape. Below are 10 common reasons your credit score might fall, along with tips for repairing your credit. 10 reasons your credit score might dropSo, you may ask: “Why is my credit score dropping?” As noted above, many factors affect your credit score — some are within your control, and others are not. Here’s a quick overview of what could decrease your credit score. 1. Missed or late paymentsPaying on time is the most critical factor impacting your credit score. It’s a top component of the two major credit score systems: FICO Score (where it’s 35% of the total score) and VantageScore (40% of total). Needless to say, late payments can tank your credit. If you miss your credit card payment by a day or two but then quickly send in the money, you might get hit with a late fee, but your credit score probably won’t suffer. Issuers often allow a 30-day grace period before reporting late payments to the credit bureaus (and some even allow up to 60 days). But if the late payments do get reported, your credit score could drop by roughly 90 to 110 points. If you continue to miss payments on a specific debt, the original creditor might sell the debt to a debt collection agency. You generally have around 180 days before this happens, but unfortunately, you might not receive advance notice. Debt collection companies can often use aggressive tactics to get debtors to pay up. And since your credit report lists any debts sent to collections, other lenders may hesitate to approve future credit applications. 2. High balancesAnother contributor to your credit score is your credit utilization ratio — which makes up 30% of your FICO Score and 20% of your Vantage Score. To calculate your credit utilization, divide your current credit card debt by your total available credit. For example, if you have a $300 balance on a credit card with a $1,000 limit, your utilization is 30%. Do this for all your credit accounts to calculate your total credit utilization. Note that installment loans (car loans, mortgages, etc.) are not factored into your credit utilization ratio, just revolving accounts such as credit cards and lines of credit. Although personal finance experts recommend a utilization ratio below 30%, your ultimate goal should be in the 1% to 10% range. When you max out a credit card, or get close to maxing it out, lenders see this as a risk that you won’t be able to pay back your debts. That’s why reducing your credit utilization ratio is the second most important factor in building good credit. 3. Identity theftIf your credit score dropped for no reason, it could signify that you were a victim of identity theft. You can scour your credit reports for warning signs, such as unfamiliar addresses or accounts. Make a point to check your credit reports using AnnualCreditReport.com. LendingTree also offers a free identity theft monitoring service. 4. Credit card fraudCredit fraud is when someone uses one of your credit cards without your knowledge. This can happen if your wallet is stolen or someone copies your credit card number. Unfortunately, the fraudster could max out your card before you even realize the card is missing. In some cases, especially if you don’t react quickly, this could leave you with a hefty bill to pay. 5. Mistake on credit reportYour credit score is based on data in your credit report. Sometimes mistakes happen, such as a payment being reported for the wrong account or a late bill showing up even though you paid it in full. By law, you’re entitled to a free credit report from each credit bureau. Regularly check it to ensure nothing is amiss. To be safe, review your reports from all three credit bureaus — Equifax, Experian and TransUnion. You’ll only need to file one dispute, since the bureaus are required to notify the others. Once a dispute is filed, you should receive a response within 30 days. 6. Cosigning a loan or credit cardCosigning a loan or credit card can help a friend or family member receive financial assistance if they don’t meet the qualifications on their own. However, being a cosigner is a big responsibility since you’ll assume equal responsibility for the loan. For example, if the original borrower has a late payment, maxes out the card, or defaults on the loan, both of your credit scores will suffer. 7. Too many credit card applicationsWhen you apply for a loan or credit product, such as a mortgage, auto loan,
personal loan or credit card, the lender typically reviews your credit history. This results in what’s called a A hard inquiry can ding your score from 5 to 10 points and stay on your report for two years (unlike an informal or “soft” check, which doesn’t affect your credit). So even if you receive approval, just applying for credit can affect your score. Also note that 10% of your credit score is determined by “new credit.” From a lender’s viewpoint, opening several new credit accounts within a short time might signal financial hardship. 8. Closing old accountsShockingly, your credit card issuer can reduce your credit limit or even close your card at any time. This is more likely to happen during tough economic periods when lenders want to reduce their exposure to possible defaults or when the card is inactive for an extended period. If your lender lowers your limit or closes your card — and you still have a balance — your utilization will suffer. For example, if you have a $300 balance with a $1,000 credit limit and your credit limit drops to $500, your credit utilization will change from 30% to 60%. Similarly, closing a credit card will remove that credit line from your overall available credit, hurting your credit score if you have high balances on other credit cards. 9. Paying off a loanA common question is, “why did my credit score drop after paying off debt?” It seems bizarre, but even though paying off a loan is a positive thing, it can hurt your credit score. This is because it may reduce your credit mix, which makes up 10% of your FICO credit score. Your credit mix considers whether you have both revolving credit (such as credit cards) and installment credit (such as mortgages, auto loans and student loans). 10. Bankruptcy or foreclosureA bankruptcy or foreclosure can severely damage your credit score — potentially causing you to lose 130 to 240 (or more) points. Furthermore, a Chapter 7 bankruptcy will stay on your credit reports for 10 years, and a Chapter 13 bankruptcy will stay for seven years. A foreclosure will remain on your reports for seven years from the date of your first missed mortgage payment that led to the lender foreclosing on your property. Another tool for rebuilding your credit is a credit builder loan. With a credit builder loan, you don’t get any funds upfront. Instead, you pay money to a financial institution that puts it into a savings account or certificate of deposit (CD). At the end of your loan period, the lender will allow you to access your saved funds. As long as the lender reports this to the credit bureaus, you’ll be on your way to building a positive payment history. What is a good credit score?The credit-scoring model most lenders generally use is the FICO Score, which ranges from 300 to 850. Your FICO Score will fall into one of five tiers, ranging from poor to exceptional credit:
Here are the factors that impact your FICO Score and their respective percentages:
9 ways to improve your credit scoreIf you want to improve your credit score or keep it going strong, here are nine steps to take:
It’s normal for credit scores to fluctuate over time. If you notice that your credit score has dipped a few points, it may be due to something simple such as a big purchase you recently put on your credit card — which would increase your utilization rate. However, if you notice that your credit score has dropped substantially, such as a fall of 50 to 100 points, that’s cause for concern. After seeing such a dramatic drop, check that you haven’t missed a payment or suffered fraudulent use of your information or one of your accounts. Why is my credit score going down when Im paying on time?When you pay off a loan, your credit score could be negatively affected. This is because your credit history is shortened, and roughly 10% of your score is based on how old your accounts are. If you've paid off a loan in the past few months, you may just now be seeing your score go down.
Why did my credit score go down if my payment isn't due yet?Late or missed payment
But once payments are more than 30 days late, card issuers will report them as delinquent to the credit bureaus. If this happens to you, you can expect your credit scores to take a hit. And if the payment is reported as being 60 or 90 days late, your credit scores could fall even further.
Will my credit score go down if I pay immediately?While it's always good to pay off debt owed, paying off an installment account, such a home or car loan, may result in an initial dip in credit scores since that account is now closed and no longer active. The good news is that any decline is temporary and scores should bounce back up within a month or two.
Why did my credit score suddenly drop for no reason?A recent hard inquiry. A hard inquiry on your credit report can also temporarily lower a score. Hard inquiries happen when a lender or company reviews your report with the intent to make a lending decision. For example, applying for a credit card, mortgage or car loan will all result in a hard inquiry.
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