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.
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