Experiencing a sudden drop in your credit score can be unsettling and may make it harder to secure a loan, acquire a new credit card, or obtain favorable interest rates. To add insult to injury, there’s really no one you can call or email to discuss the exact reasons why it happened.
But don’t panic just yet. Understanding why your credit score may have dropped and knowing what steps to take can help you regain control. Read on to learn more about the potential reasons for a lowered credit score and what you can do to improve it.
REASONS WHY YOUR CREDIT SCORE GOES UP OR DOWN
A credit score is a numerical representation of the risk you pose to a lender. When applying for any type of credit or loan, lenders prefer to work with people who statistically have a greater chance of paying them back in full.
Experian, Equifax, and TransUnion are the three major credit bureaus. Each one has its own proprietary algorithm that determines your credit score based on information in your credit report.
Several known factors can cause your credit score to rise or lower:
Late or Missed Payment
Payment history makes up around 35% of your credit score. Just one missed payment can cause a significant dip, and making regular payments over time can cause your credit score to rise. The actual length of time it will take to improve varies between credit bureaus.
High Credit Utilization
Credit utilization refers to the ratio of your credit card balances to your credit limits. If you have a $10,000 credit limit and a $5,000 balance, you have a 50% credit utilization. A high utilization rate can impact your credit score. Ideally, you should keep this ratio below 30%.
Closed Credit Card
Let’s pretend that you have two credit cards, each with a $5,000 limit ($10,000 in total). Imagine that you just made a purchase on one of the credit cards for $2,000. Your credit utilization is now 20%, which is well under the recommended 30% mark.
However, if you were to close the other credit card, your total utilization would increase from 20% (due to the $10,000 credit limit) to 40% (due to the $5,000 credit limit). Closing a credit card also reduces the length of your credit history and can negatively impact your credit score.
Applying for New Credit
If you’re wondering if your credit score is low after getting a credit card, the answer is that it depends. Whenever you apply for a new loan or line of credit, the lender requests to review your credit report. This is known as a “hard pull” or “hard inquiry.”
A record of this credit pull is noted on your credit report and will stay there for a period of time. Too many hard inquiries in a short time span can make lenders view you as a high-risk borrower, causing your score to decrease.
Bankruptcy or Loan Default
Severe delinquencies (e.g., defaulting on a loan or going into bankruptcy) can negatively impact your credit score in a significant way. The effects of defaulting can linger for many years on your credit report.
Identity Theft or Inaccurate Information
If someone steals your credit card and racks up unauthorized purchases, you will notice a credit score decrease if you don’t catch it in time. Once the payments become delinquent and get sent to a collection agency, it becomes exponentially harder to remedy the situation.
Credit bureaus sometimes report inaccurate information, such as erroneous payment history or personal data. Fortunately, you can address this situation by going to the credit bureau website and following the instructions to file a dispute.
HOW TO IMPROVE YOUR CREDIT SCORE
Unless you’ve been the victim of identity theft or have inaccurate information on your credit report, it could take some time to raise or repair your credit score. Here are several highly recommended ways you can begin the process:
Make Regular Payments
Paying your bills on time is the best way to increase your credit score. Consider setting up automatic payments to ensure you don’t accidentally forget to make a payment. Or, use an online bill pay service to set up your payments. Alternatively, you can also walk into any Fibre Federal Credit Union location in Washington or Oregon to make an in-person payment.
Check Your Credit Often
Regularly monitoring your credit will allow you to identify the potential cause of credit score dips and take the necessary corrective action.
Monitor Your Credit Cards
Be sure to check your credit statements every month. You’ll be able to catch any unauthorized transactions before they go into delinquency.
Minimize Debt
Try to avoid increasing your credit card debt with purchases you cannot pay off by the time your next bill is due. You can accomplish this by setting up a budget and practicing responsible spending habits.
ARE YOU AN IDENTITY THEFT VICTIM?
If you suspect that your credit score drop is due to identity theft, you must act promptly. Contact the fraud departments at your financial institution and credit card issuers to immediately report the unauthorized transactions. You should also contact the three major credit bureaus and ask them to place a credit freeze and fraud alerts on your accounts.
Additionally, contact the Federal Trade Commission (FTC) online at IdentityTheft.gov or call 877-438-4338 to report identity theft.
Lastly, file a complaint with your local police department. The police will take a report, which can be a valuable tool to help contest any charges you did not authorize.
CREDIT SCORE FAQs
Here are some frequently asked questions to help you gain a better understanding of the sometimes complex world of credit scoring:
Q: Does Your Credit Score Drop When You Check It?
The answer is no. Regularly checking your credit score will not cause it to drop. In fact, it’s a good thing to check it often as this will allow you to identify potential causes sooner rather than later.
Q: What Is a Low Credit Score?
Credit scoring differs from model to model. A general range is as follows:
Q: How Often Is My Credit Score Updated?
The credit bureaus will typically update your credit score every 30 to 45 days, which often occurs when they receive new information from your creditors regarding your accounts.
Q: How Many Points Does a Collection Drop Your Credit Score?
A single debt moved to collection can drop your score by at least 100 points, and subsequent collections can lower it even more.
Q: Why Did My Credit Score Drop After Paying off Debt?
While paying off your debt is a good thing, it can lower your credit score if you now have fewer types of credit accounts, a lower average credit account age, or a change in your credit utilization ratio.
Build Your Credit With Fibre Federal
While seeing your credit score drop can be disheartening, it’s important to remember that it’s not the end of the world. Understanding the factors that can influence your credit score will allow you to take steps to address them and put you back on the path to financial health.
Click the link below for more information on how to get started.
See How to Check Your Credit Score & Credit Report
