Credit score

Why did my credit rating just drop? 6 common reasons

Your three-digit credit score can mean the difference between being approved for a new financial product with solid terms and being stuck with sky-high interest rates — or worse, turned down outright. It can therefore be extremely frustrating to think that you are doing well financially, only to find that your score has dropped.

Credit scores work as a snapshot of your credit history that helps lenders – and often landlords – determine the level of risk you pose as a borrower or renter. The better your credit score, the lower your interest rates will be and your credit limits will be higher, while the reverse is true the lower your score. But credit scores also change frequently, and sometimes for no obvious reason.

“Scores fluctuate all the time as the information in your credit history evolves and changes,” says Rod Griffin, senior director of consumer education and advocacy at Experian.

Here are the six most common issues that can lower your credit score, according to Griffin:

1. You missed payments

The most common reason people’s credit scores drop is because they missed a payment, Griffin says.

“If you are unable to pay a debt as agreed, it will have a negative effect,” he says.

Missed payments are reported to the major credit bureaus once they’re 30 days late, so it won’t impact your credit score if you make the payment a few days late (although you probably had to pay late fees). But if you don’t make at least the minimum payment after 30 days, it can seriously hurt your credit score: According to FICO credit damage dataa person who has never otherwise missed a payment could lose more than 80 points after missing a payment for more than 30 days and another 50 points after 90 days.

That’s why it’s important to pay at least the minimum amount required each month when the option is available, even if you can’t afford to pay off your entire balance. Although you must eventually pay the full amount in order to avoid having a high credit utilization rate (more on this later), your payment history is often the most important factor in determining your credit score. .

You should also always contact your lender if you’re having trouble meeting your mortgage, student loans, or car payments to avoid defaults. You may be able to reduce your monthly payments or have loans suspended, which will not impact your credit score.

2. Your credit utilization rate is too high

Your credit utilization ratio is the ratio of the amount of credit you use to the amount you have. The standard goal is to keep your credit utilization rate below 30%. You may have a great track record of paying on time and in full, but if you only have one credit card and you use 90% of the total amount, your credit score will still suffer. .

Griffin advises borrowers in this situation to open another account and split your usage between the two because “if you’re using your credit well and can keep usage low on both cards, you’ll likely see scores improve with the time”.

But keep in mind that this strategy can also backfire if you can’t maintain low usage of both cards. Then you’ll probably end up lowering your credit score because you’ve depleted your cards and have a high balance each month, resulting in a high usage rate. This is where making only the minimum payments on your cards may not be enough. You will need to pay more than the minimum amount if you want to lower your usage rate to increase your overall score.

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3. You recently took out a new line of credit

You may have seen a drop in your credit score if you have recently been accepted for new lines of credit. The amount of your score will depend on the size of the loan and your overall credit history, but it’s one of the most common reasons people’s scores drop, according to Griffin.

It might not make sense on the face of it: you had a good enough score to get a low-interest mortgage, so why would it suddenly drop now that you have it? But from a creditor’s perspective, Griffin says that even if you have a good credit history, they don’t know whether or not you’ll continue to make the required payments over the long term.

The good news is that if your credit score dropped after being approved for a new loan, once you make payments steadily over the next few months, it will likely bounce back or even rise as you build a longer credit history.

A common piece of knowledge about building credit is that your score tends to be hit whenever a “hard” credit check is performed on you, usually when applying for a new line of credit or an apartment. . But according to Griffin, a credit check alone is unlikely to have a major impact on your overall score — maybe 10 points at most.

“You might see your scores drop a bit at first, but inquiries are really the least important factor in credit scores and will have the least impact,” he says.

If your credit score seems to have taken a significant hit after applying for a new line of credit, then you “have much bigger issues that are driving your scores down than this investigation,” Griffin says.

Consider the last time you checked your credit score and your overall credit history before you worry too much about the impact of an application on your score.

4. You recently declared bankruptcy

It might seem like a no-brainer, but yes, filing for chapter 13 and chapter 7 bankruptcy will absolutely have a direct effect on your credit scores.

“Declaring bankruptcy means your scores are going to drop a lot,” says Griffin. This is because when you declare bankruptcy, you’re basically telling creditors that you represent a major credit risk in exchange for the cancellation of a debt that you will never be able to repay. If you declare bankruptcy with a good credit score, you could see your credit score drop by more than 200 points.

Rebuilding your credit score after filing for bankruptcy will take a lot of time and effort, but after seven years the bankruptcy will be removed from your credit report and you can get approved for more credit-building financial products.

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5. Your credit score is different from normal

The credit score you access through your bank may not be exactly the same as another provider’s, even if you access it on the same day. If your credit score seems to have taken a hit, you’ll want to make sure you’re looking at the same score as usual.

The two main consumer credit scoring companies are FICO and VantageScore; although they both use the same 300-850 scale to generate scores, the way these scores are calculated may be different. For example, VantageScore takes into account things like your “pattern of behavior” (i.e. making efforts to pay off an existing card balance over time), unlike FICO scores. But even within a scoring system, there can be discrepancies between your score, depending on the scoring model used.

“It is essential that you know what score you are looking at. Not just if it’s a FICO score, but is it the same FICO score you’re used to,” says Griffin.

For example, a typical FICO score is between 300 and 850, with 850 being the best possible score. But a lender for a car loan will often use the specific auto FICO score, which ranges up to 900 points, so your score may appear drastically different on this report when you’re preparing to buy a car.

6. You have been the victim of fraud

If none of the above applies, but your score has dropped significantly, you may want to take a look at your full credit report for any suspicious activity. Purchases you don’t remember making, loans taken out in your name, and credit cards you never subscribed to at most are major red flags for identity theft.

“Someone operating a fraudulent or stolen account could definitely affect your credit score,” says Griffin. “That’s why we always encourage people to check their credit history regularly.”

Unlike most other reasons your credit score might drop, if you’re a victim of identity theft, you’ll be able to remove the activity that’s hurting your score from your credit report. But it’s better to detect suspicious activity as soon as possible to avoid spending hours trying to verify the legitimacy of each element of your report.

Signing up for a free credit monitoring service like those offered by Experian and Credit Karma can help detect and protect you from fraud.

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