Did you get an unwanted surprise recently when your credit score dropped? Before you panic over an unexpected decrease, understand that everyone’s credit score fluctuates based on several factors, most of which have relatively easy fixes.
Credit Score Drop Reason #1: Were you recently late on a payment or miss a payment altogether?
Of the five factors that go into credit score calculations, bill payment history counts the most at 35 percent. If you’re late or miss a payment, your credit score will likely drop, especially if you’re repeatedly late or negligent.
Credit Karma explains why this is such a big deal:
“Your credit scores indicate how likely you are to repay any debts you owe. If you’ve proven that you can’t pay one of those debts on time, that’s a potential red flag.”
- Always pay your bills on time, even if it’s just the minimum
- Set up automatic payment reminders for your bills, a feature many creditors offer
- Use bill pay, especially if you’re forgetful or extremely busy
- Let the creditor know right away that the late payment is coming, as this may prevent it from being reported to the credit bureaus
Credit Score Drop Reason #2: Have you recently maxed out your credit cards?
Whether it’s one big purchase or several decent-sized ones, increasing your card balance means you have less available credit. This leads to a higher utilization rate, which is the difference between your total credit used and total credit available. It is a big part of your overall debt level, which makes up another 30 percent of your credit score. As your utilization rate changes, so does your credit score.
The Short-Term Fixes:
- Don’t charge anything else to your credit cards to keep your balances from further increasing
- Make significant payments each month to reduce your balances
- Request a higher credit limit to increase your total available credit
The Long-Term Fix:
- Try to continually maintain a utilization rate of 30 percent or less.
Credit Score Drop Reason #3: Did you just close an old account?
Credit score calculations also take into account your overall credit history (15 percent). This includes the age of your oldest account and the average age of all of your accounts. So, closing out one of your oldest accounts can have a real impact on your credit score.
- Instead of closing an old account due to a high interest rate, request a lower rate as a loyal customer
- Keep the account and use it sporadically, just for its age benefit
Credit Score Drop Reason #4: Have you been applying for new credit?
When you apply for a new credit card, mortgage, or car loan, the creditor checks your credit history. Such hard inquiries can lower your credit score. Although they only account for 10 percent of your score, multiple hard inquiries within a short time span can be particularly damaging.
- Limit your credit applications to essential requests and those likely to be approved
- Wait it out, as hard inquiries only count against your score for 12 months
Credit Score Drop Reason #5: Did you recently pay off a loan?
Creditors like to see experience handling various types of accounts, which is why your credit mix is also a factor in your credit score (10 percent). According to the balance, having a good mix of revolving credit (i.e., credit cards, home equity lines of credit, etc.) and installment loans (i.e., mortgages and car, student or personal loans) will positively impact your credit score. The reverse is true when you pay off a loan. It may weaken your credit mix, which in turn could cause your score to fall.
- If you need to apply for new credit in the near future, time your loan payoff accordingly so your credit score can be at its highest
Credit Score Drop Reason #6: Has an overdue account been sent to a collection agency?
Obviously, it’s bad for your credit score if you default on a credit card or other loan account and it goes to a collection agency. But did you know that when many other non-credit bills, such as medical ones, go to collections because of delinquency, it can also impact your score?
- Resolve any disputed bill before it’s turned over to collections
One last fix to maintain credit score health
Plan wisely. If you know you’ll be applying for new credit in the near future, make sure you’re practicing all of the above fixes to keep your credit score from dropping.