It can be disheartening to see your credit score drop suddenly, but by quickly identifying the reasons behind it, you can get it back on track. To learn more about the different reasons that cause credit scores to drop without your knowledge, continue reading this blog.
Fortunately, many credit score dings are temporary. You can recover your score by taking proper action before things get out of hand. Take a note of the reasons mentioned below that contribute to such a scenario.
Six possible reasons why your credit score may suddenly drop.
1. You recently applied for a new credit card.
When you apply for a new credit card, the credit issuer pulls your credit report since they want to determine whether you’re a good or bad candidate for credit. This credit check, known as a hard inquiry, can temporarily lower your credit score by a few points.
Though these hard inquiries remain for two years on your credit report, FICO only considers the ones that have been there from the last 12 months when calculating your credit score.
Moreover, hard inquiries on your credit report aren’t always that bad when it’s in moderation. It is good to remember that getting a credit card is one of the best ways to build your credit. When you use your credit cards correctly and pay your bills on time, it can help increase your credit score.
You can reduce the number of hard pulls on your credit by checking if whether or not you qualify for a new card by using issuers’ pre-approval offers. There’s no guarantee you’ll get approval for specific credit cards, but you’ll get a good idea of your chances.
While applying for new credit products, make sure to spread out your credit card applications over time. Apply for credit cards only every three months, or wait longer in between your applications when your credit score is low.
2. You missed a credit card payment.
Your payment history is a crucial factor in calculating your credit scores. Rather, it is the second most important factor in FICO’s scoring model, accounting for 35% of a score. If you’re late to make your payments only by a few days, it will not reflect on your credit report, but if you’re late by more than 30 days, card issuers will report it as a delinquency to the credit bureaus.
Your credit score is likely to take a hit if this scenario ends up happening. If you’re as late as 90 days in making your payment, your credit score could drop even further.
Keeping track of payments can be difficult if you have multiple credit cards and loans. It is best to enroll in automatic payments to avoid missing future payments.
3. Your credit utilization rate changed.
Credit utilization refers to how much of your available credit you use each month, another important factor in determining your credit scores. According to VantageScore and FICO, your credit utilization rate accounts for 30% of your overall score.
If you somehow end up using more credit than you usually do, it will increase your credit utilization rate. Wondering about the level of impact your credit score will go through? It will vary depending upon the ratio of credit used versus available credit that went up. The Consumer Financial Protection Bureau recommends keeping your credit utilization rate below 30% to keep your credit scores steady.
For instance, you have a credit limit of $10,000, of which you use only $1,500 a month. In that case, your credit utilization rate will be 15%. If your spending increases to $2,500, your credit utilization rate will be 25%, and if it increases to $5,000, your credit utilization rate will be 50%. Your credit score is bound to decline in this scenario.
4. You paid off a loan.
It may seem paradoxical, but paying off your debt like a mortgage or a student loan can hurt your credit score and cause it to drop. Why does this happen? When you pay something off like a car loan, it means you have one less credit line in your name.
Paying off loans lowers your credit scores because it could change your credit mix, which accounts for 10% of your FICO score. Credit mix is important because it shows that you can manage different types of debt.
Nonetheless, it does not mean that you should not pay off your loans. You can still build a strong credit score without having one of each type of credit.
5. You closed a credit card.
Multiple reasons can cause your credit score to drop when you close a credit card. First, it reduces your available credit, which means if you don’t reduce your spending, your credit utilization ratio will go up.
The second reason closing a credit card could hurt your credit score is if it impacts the average length of your credit history. The older your account is, the more it can affect your average account age when closing it. You should close your oldest credit accounts only when it is absolutely necessary.
6. You fell prey to identity theft.
The most frightening reason for a drop in your credit score is when you’ve become a victim of identity theft. Someone could have stolen your identity and applied to open new credit accounts using your credentials. Don’t panic when you find out that an impostor is misusing your identity. You can take appropriate action to reverse the damage it may have caused to your credit score.
First, you need to find out how you can spot identity theft. Consider credit monitoring to identify any suspicious activity quickly. You’re eligible to get one free credit report periodically from the three main credit bureaus.
You’ll likely want to have a recovery plan in place if you’ve been a victim of identity theft. You can start by placing a fraud alert on your credit file. You need to place the alert with one credit bureau, and the other two will automatically get notified. Once you’ve done this, you will want to fill out an identity theft report with the FTC.
If you find that fraud alert isn’t helping slow down identity thieves, you may want to consider freezing your credit. This will make it almost impossible to access your credit file, making it difficult for frauds to open new accounts in your name.
It is natural to feel anxious when you see your credit score drop suddenly, but thankfully there are ways to combat it. It is best to avoid this situation, and now you know how to prevent it from happening. As mentioned earlier, occasional checks on your credit report can save you a lot of hassle.