If you are a savvy consumer, you probably check your credit score regularly and aim to keep it in good shape. If you’ve ever checked your credit score and found it lower than the year before, it can be a cause for concern. Here are some of the most common reasons your credit score might have dropped.
You Missed a Payment
Payment history is arguably the most important factor in calculating your credit score. So when you are late to pay an account by 30 days or more, the resulting negative reporting from whatever company (or landlord) you paid late can cause your credit to take a hit. If you missed a payment, pay it right away; late payments of 60 days, 90 days or longer, have a greater negative impact on your score. If you have missed payments long enough for an account to go to collections, contact the collection agency right away to pay off the debt or set up a payment plan. How many points a late payment or collection drops your credit score depends on many factors, but remember that it can stay on your credit report for up to seven years.
You Have a Higher Credit Utilization
Maybe you took a vacation or had some unexpected expenses last month and used your credit card more than you normally would. These higher credit card balances contribute to your overall credit utilization rate (the percentage of available credit that you use). More debt equals a higher credit utilization rate and a lower credit score. Make an effort to pay down your credit card debt quickly to help bring your score back up.
You Closed a Credit Card Account
Sometimes closing a credit card account that you don’t use seems like a good idea, but look carefully at your credit situation before you do it. When you close a credit card account, it can negatively affect your credit in two ways. First, if you’ve had the card for a long time, it decreases the length of your credit history. Remember, the longer you have had accounts in good standing, the better it is for your credit score. Second, closing a credit card account will decrease the amount of credit available to you, thus increasing your credit utilization.
You Paid Off a Loan
Making the last payment on your car loan or student loan debt is a great accomplishment, but did you know that it can have a negative impact on your credit score? It seems unfair — how can a credit score drop after paying off debt? Fair or not, it can occur because paying off a loan changes your credit mix. Lenders like to see a mix of different types of credit on your credit report. This means having both revolving accounts, such as credit cards, and installment loans, such as home or auto loans. But don’t let this deter you from paying off your loans as promised. Be proud of your achievements and continue to build that good credit.
You Applied for Credit
When you apply for a loan or a new credit card, lenders make what is called a “hard inquiry” on your credit when they decide whether or not to approve your loan. Each hard inquiry from a lender will cause a small decrease in your credit score. If you are shopping around for the best rates, keep your search within a 30-day window, as multiple inquiries within this timeframe will usually be counted as only one inquiry by credit bureaus.
Mistakes on Your Credit Report
Sometimes, a mistake will show up on your credit report. That’s why it’s so important to check your credit score regularly. If you find an error on your credit report, call your lender immediately or file a dispute with the credit bureau. While the act of filing a dispute itself has no impact on your credit score, your score may eventually change depending on the outcome of the dispute.
It’s everyone’s worst nightmare, but unfortunately, it happens all too regularly. If you see accounts on your credit report that you don’t recognize, you may be a victim of identity theft. It is important that you take action right away. Start by visiting identitytheft.gov to report the fraud. From there, you can begin the process of disputing the fraudulent accounts. To prevent identity theft, check your credit reports frequently and consider a credit monitoring service.