7 Reasons Your Credit Score Might Have Dropped Example
A good credit score can be highly important and beneficial, especially when it comes to gaining the specific perk offered by a good credit score. Don’t get it? Well, this mainly includes the various benefits that you gain with a good and maintained credit score. This may include saving a specific amount of money over time and/or making you qualified for various credit products at specific interest rates. However, if we talk about the bad credit scores, this might simply prevent you from qualifying for such products or otherwise cost you a higher interest rate.
Due to this reason, almost everyone works forth maintaining a good credit score. However, there may be times that you wouldn’t be doing anything wrong, yet your credit score may drop. Have you ever faced such an unexpected situation? If so, then you’re certainly not aware of all the potential explanations that make these static numbers fluctuate. Now, since credit scores keep changing from time to time, it’s often not something you did bad, i.e., default a loan, etc. Instead, there may be positive changes too that can cause this score to drop.
Top 7 Reasons:
If you’ve unexpectedly faced a sudden drop down in your credit score and you don’t know what went wrong, it may have been caused by some common reasons explained below.
- Late or Missed Payments:
The most important part of anyone’s credit score is his/her payment history. Whether you miss or delay even a single payment, it might harm your credit score by lowering it down.
For example: if you delay your payment for 30 days or more (after the due date), the credit scores will end up reporting your delinquency to either one (from the only three) of the major credit bureaus. This will result in a drop-down of the score. Moreover, if you delay payments for 60 or 90 days, then your credit score is expected to face a greater effect (in a negative manner).
To avoid this, it’s highly important to keep yourself aware of all the payments due date and then always make the payments on time.
- Recent Application for Mortgage, Loan, or Credit Card:
Another common reason for the credit scores decrease is applying for a mortgage, new credit card, or even a loan.
For example: Since all these are termed as ‘credit’ benefits, applying for a new credit line will make the lenders demand you for your entire credit history. Now every time you opt for credit and authorize someone other than yourself, i.e., a lender, a hard inquiry is conducted on your overall credit report. This hard inquiry may affect your overall credit score for up to 2 years.
Now with the maturing of your credit, it may naturally face some hard inquiries. However, if you tend to apply more for multiple credits in lesser time, then your scores may be highly impacted. Yet, if your credit scores present inquiries are limited, then a new inquiry may cause a drop-down in the score for a lesser time.
Now to overcome this drop-down, if you make sure to not apply for any new credit, this effect may vanish in the time-span of 1 year.
- Increase in Credit Utilization:
Even if you’re using your credit card to make larger investments may also cause your credit score to drop.
For example: if you buy a fancy TV as a large purchase from your credit card (depending upon its limit), then your credit utilization ratio may increase. This increased credit utilization ratio is another highly important factor that is considered while the credit score is calculated. Now, this increase if the credit utilization ratio may make the lenders consider that you are overextending (making you unqualified for a new debt).
To cover this up, it’s better to keep your credit utilization ratio below the rate of 30% or below 10% for the most effective scores. As a result, even if your credit limit is $10,000, then you need to keep your balance below $3,000.
- Lowering of Any of Your Credit Limits:
Just how the increased use of credit cards affects your credit score, having a lowered credit limit may also increase your credit utilization ratio, causing the credit score to drop-down.
For example: if you had a credit limit of $10,000 and your balance was $3,000, then your utilization ratio was 30%. However, if your credit limit lowered to $6,000 and your balance remained the same, then you might end up facing an increased utilization ratio of 50%. This sudden change can cause your credit scores to decrease.
Now to avoid this, it’s better to stay aware of your fluctuating credit score by keeping an eye on your credit utilization ratio – at all times!
- Closing of a Credit Card:
Even if you don’t use a credit card, closing it might not be a great idea. This is mainly because closing a credit card account may not only increase the utilization ratio of your credit, but instead, it will also reduce the credit history length of your account; while lowering the credit history itself.
For example: if you close a credit card, then that card's credit limit is removed from the overall utilization ratio. This has the potential ability to lower your overall credit scores.
Hence, if your credit card doesn’t have a high annual fee (which may be hard for you to afford), then it’s better to keep it open. Besides, that wouldn’t hurt you more than a decreased credit score would, right?
- Inaccurate Credit Score Information:
At specific times, your file may show inaccurate information as a rare mistake by the lender. However, this rare incident may be a cause of the drop-down in your credit scores. Hence, to avoid this, it’s better to regularly keep a check on your credit reports and ensure that there is no inaccurate information showing up on your file.
- Facing Events like Foreclosure or Bankruptcy:
Late payments can often lead to horrible incidents like bankruptcy or foreclosure. However, what makes things worse is the event itself. Since both these are legal processes that are initiated by the borrowers or the mortgage lenders, you might end up losing all or most of your belongings during such tragic incidents.
But that’s not all, as both bankruptcy and foreclosure may also awfully harm your credit score. Moreover, both these events may also cause you disqualification from being able to apply for specific borrowings in the future.
Now to avoid this, it’s better and highly important to make your payments on time!
With the above-mentioned reasons that may cause your credit score to drop down, you might have had a clear idea of what’s causing this unexpected change in the credit, right? Well then, it’s to evaluate what you’re doing wrong and fix your mistake before you face a greater loss!