Why Did My Credit Score Drop?

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If you have a pretty solid credit history and have recently had an unexpected drop in your credit score, you naturally want to know what happened. Whether it dropped by 10 points or 100, it’s important to fully understand all of the factors that can cause your credit score to rise and fall.

Most people know that major financial events like foreclosure and bankruptcy are surefire ways to knock significant points off anyone’s credit score. What’s less common knowledge, however, is that there are quite a few other reasons for a declining credit score. The more you familiarize yourself with everything that goes into calculating your credit score, the better equipped you’ll be to bring yours back up again.

1. High balances. Even if you’re really good about paying your monthly credit card bills, carrying a significant balance on several cards will bring your credit score down. Put yourself on an “unnecessary spending” freeze and throw as much money as possible at your existing debt, with the goal of getting as close to a $0 balance as you can. At the very most, you should keep your credit card balance(s) under 30% of your credit limit. This tells potential lenders that you aren’t fully reliant on credit cards, and makes you less of a credit “risk.”

2. Late payments. Although this one seems fairly obvious, it’s possible that you’ve had 1 or 2 late payments and not thought much of it. Unfortunately, sometimes being just 30-60 days late paying a single bill can hit your score kind of hard. What’s most surprising is that your score may drop more substantially if it was the first time you ever missed a payment. To avoid missing any more payments, try to set up automated bill pay for as many bills as possible. For all others, set payment reminders on your phone or personal calendar.

3. New loan applications. If you have recently applied for a car loan, mortgage, or even a new credit card, the lender will have done what is called a “hard credit inquiry.” These types of inquiries will cause your score to drop only slightly if you only have a few done over an extended period of time. However, multiple hard inquiries suggest that you may be desperately applying for loans and getting turned down repeatedly. The more hard inquiries you have, the higher the impact on your score. Try to limit who does a hard credit check on you by being selective about applying for loans. Do your research and be sure that you will likely be approved before applying so that the number of people who need to check your credit history is low.

It is important to mention here that you cannot damage your credit score by simply checking your own score.  In fact, some lenders will accept a very recent copy of your credit report instead of doing another check on their own. This is another way you can prevent your score from dropping. If you are planning to apply for a new car loan, request your credit report and score immediately before going to the car dealership. Present them with your credit report and ask them to use it in their decision making process. It never hurts to ask!

4. Closed accounts. In working hard to pay down your debts, you may go ahead and completely close out a credit card account once you pay off the balance. Some people do this thinking it will prevent them from acquiring more debt since the account won’t even exist anymore. Though that may seem like a good idea, doing so will actually negatively affect your credit score! Lenders like to see that you have a long (positive) history of handling your debts. Cancelled accounts essentially cease to exist on your credit report, so it may give lenders the idea that your credit history doesn’t extend very far into the past. The best thing to do is to pay down your credit card balances but keep the account(s) open so that the ‘proof’ of your credit-worthiness remains for all to see on your credit report.

Keep a close eye on your credit report and score once you’ve made some of the positive changes suggested above. If your score doesn’t improve within several months, or continues to drop, seek credit counseling assistance from a licensed NJ credit repair attorney. Your credit score is extremely important, and ignoring a declining score can end up being a very costly mistake.

Image Credit: W. Rashdanothman

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