Your triple-digit credit score can be the difference between being approved for a new financial product with solid terms and being stuck with sky-high interest rates – or worse, turned down completely. So it can be incredibly frustrating to think that you are doing well financially, only to find that your score has gone down.
Credit scores work like a snapshot of your credit history that helps lenders – and often homeowners – determine your risk as a borrower or tenant. The better your credit score, the lower your interest rates and the higher your credit limits, while the reverse is true, the lower your score. But credit scores also change frequently, and sometimes for no obvious reason.
“Scores fluctuate all the time based on changes and changes in your credit history information,” says Rod Griffin, senior director of consumer education and advocacy at Experian.
Here are the six most common problems that can lower your credit score, according to Griffin:
1. You missed payments
The most common reason that people’s credit scores have dropped is because they’ve missed a payment, Griffin says.
“If you are not able to pay a debt as agreed, it will have a negative effect,” he says.
Missing payments are reported to major credit bureaus once they are 30 days late, so it won’t impact your credit score if you make the payment a few days late (although you will likely have to pay late fees). But if you don’t make at least the minimum payment after 30 days, it can seriously damage your credit score: According to FICO credit damage data, a person who has never missed a payment can lose more than 80 points after missing a payment for more than 30 days and another 50 points after 90 days.
This is why it is important to pay at least the minimum required amount each month when the option is available, even if you cannot afford to pay your entire balance. While you will ultimately have to pay the full amount in order to avoid having a high credit utilization rate (we’ll talk about that later), your payment history is often the most important factor in determining your score. credit.
You should also always contact your lender if you are having trouble honoring your mortgage, student loans, or car payments to avoid default. You may be able to lower your monthly payments or have the loans suspended, which will not affect your credit score.
2. Your credit utilization rate is too high
Your credit utilization rate is the ratio of the amount of credit you use to the amount you have available. The standard goal is to keep your credit utilization rate below 30%. You may have a great history of paying on time and in full, but if you only have one credit card and use 90% of the total amount, your credit score will still suffer.
Griffin advises borrowers in this situation to open another account and split your usage between the two, because “if you’re using your credit well and can keep usage low on both cards, you’ll likely see the scores go down.” improve over time ”.
But keep in mind that this strategy can also backfire if you can’t maintain low use on both cards. Then you will likely end up lowering your credit score because you’ve run out of cards and have a high balance every month, resulting in a high usage rate. This is where the minimum payments on your cards may not be enough. You will need to pay more than the minimum amount if you want to lower your usage rate in order to increase your overall score.
3. You recently took out a new line of credit
You may have experienced a drop in your credit rating if you have recently been accepted for new lines of credit. The actual amount of drop in your score will depend on the size of the loan and your overall credit history, but it’s one of the most common reasons people get low, according to Griffin.
It might not make sense at first glance: You had a good enough score to get a low interest mortgage, so why would it suddenly drop now that you have it? But from a creditor’s perspective, Griffin says that even if you have a good credit history, they don’t know whether or not you’ll continue to make the required payments over the long term.
The good news is that if your credit score has gone down after being approved for a new loan, once you’ve made consistent payments over the next few months, it will likely bounce back or even increase as you build up a credit history. longer credit.
It is well known that your credit rating tends to drop whenever a “hard” credit check is performed on you, usually when applying for a new line of credit or a new apartment. But according to Griffin, a credit check alone is unlikely to have a major impact on your overall score – maybe 10 points at most.
“You might see your scores drop a bit at first, but inquiries are really the least important factor in credit scores and will have the least impact,” he says.
If your credit score seems to have taken a big hit after you apply for a new line of credit, then you “have much more serious issues that are lowering your score than asking,” Griffin explains.
Consider when was the last time you checked your credit score and all of your credit history before worrying too much about the impact an application might have on your score.
4. You recently filed for bankruptcy
It might sound like a no-brainer, but yes, declaring Chapter 13 and Chapter 7 bankruptcy will absolutely have a direct effect on your credit scores.
“Declaring bankruptcy means your scores will go down a lot,” Griffin says. This is because when you file for bankruptcy, you basically tell creditors that you represent a major credit risk in exchange for forgiveness of debts that you will never be able to repay. If you file for bankruptcy with a good credit rating, you could see your credit rating drop by more than 200 points.
Recovering your credit score after filing for bankruptcy will take a lot of time and effort, but after seven years bankruptcy will be removed from your credit report and you can get approval for more credit building financial products.
5. Your credit score is different than usual
The credit score you access through your bank may not be exactly the same as another provider’s, even if you check it on the same day. If your credit score seems to have taken a hit, you’ll want to make sure you’re looking at the same score as usual.
The two main consumer credit rating companies are FICO and VantageScore; although they both use the same scale from 300 to 850 to generate scores, the way these scores are calculated may be different. For example, VantageScore takes into account things such as your “pattern of behavior” (that is, making efforts to pay off an existing card balance over time), unlike FICO scores. But even within a scoring system, there can be discrepancies in your score, depending on the scoring model used.
“It is essential that you know what score you are looking at. Not just if it’s a FICO score, but is it the same FICO score you’re used to, ”says Griffin.
For example, a typical FICO score has a score range between 300 and 850, with 850 being the best possible score. But a lender for an auto loan will often use the specific FICO Auto score, which goes up to 900 points, so your score may appear drastically different on this report when preparing to buy a car.
6. You have been the victim of fraud
If none of the above situations apply, but your score has dropped significantly, you may want to carefully review your full credit report for any suspicious activity. Purchases you can’t remember, loans in your name, and max credit cards you’ve never taken out are the biggest red flags of identity theft.
“Someone who takes maximum advantage of a fraudulent or stolen account could definitely affect your credit score,” Griffin says. “That’s why we always encourage people to check their credit history regularly. “
Unlike most other reasons your credit score can drop, if you are a victim of identity theft, you will be able to remove the activity that is hurting your credit score from your credit report. But it’s best to catch suspicious activity as early as possible to avoid spending hours trying to verify the legitimacy of every item in your report.
Signing up for a free credit monitoring service like those offered by Experian and Credit Karma can help you detect and protect yourself against fraud.
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