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Your credit score is an important number that can have a big impact on your life. Although it is just three digits, it can tell potential lenders a lot about your creditworthiness.
If you regularly monitor your finances, then you may notice when your credit score drops. If you are left wondering, "Why did my credit score drop" then look no further.
We will take a closer look at some of the reasons behind this unexpected drop. Plus, we will highlight ways that you can get your credit score back on the right track.
"Why did my credit score drop?" - 5 Common factors
A credit score is a reflection of your credit report. The factors that affect your credit score can pull your score down or build it up depending on your choices. Let’s dive into some of the common reasons to answer your question "Why did my credit score drop?"
1. Too many hard credit inquiries
When you are shopping for a new loan of any kind, then you are likely keeping a close eye on your credit score. You may notice a sharp drop while you are in the midst of applying for new loans.
In this case, the drop in your credit score is likely a result of too many hard credit inquiries. Although credit inquires play a small role in your overall credit score, it could be the reason behind your most recent drop.
If you’ve applied to several new lines of credit in the past month, then this is the most likely reason for the drop. It is important to note that checking your credit score is not considered a hard inquiry. You’ll only need to worry about hard inquiries if you are applying for a new loan or line of credit.
2. Late and missed payments
A late payment can be a blemish on your credit report, which can lead to a lower credit score. That is especially true if you make late payments on a consistent basis. If you missed a payment altogether, that could cause your credit score to drop too.
Lenders favor borrowers that can make on-time payments on a regular basis. A lower credit score could indicate to any potential lenders that you aren’t consistent about making on-time payments.
3. Growing balances
If you have any revolving debt, it is possible for the balances to grow each month. For example, if you have credit card debt, it can grow each month that you don’t pay off your balance in full.
A growing amount of revolving debt leads to an increase in your credit utilization rate. If you have a $10,000 credit limit with a balance of $5,000, then you have a utilization rate of 50%.
FICO uses your balances to determine 30% of your FICO score. With that, it is important to keep your utilization rates as low as possible. Many experts recommend keeping your credit utilization rate under 30% to prevent a negative impact on your score. So start paying down those balances on your accounts.
4. Closing an old account - causing your credit score to drop
Although it can be tempting to close an account after paying off your debt, that can lead to a drop in your credit score. FICO credit scores factor in the age of your accounts. Older accounts are considered a positive feature of your credit history.
After all, if you’ve been able to responsibly manage your credit for a long period of time, then lenders want to work with you. As you close older accounts, the average age of your credit accounts will fall and possibly drag your credit score down as well.
5. Bad remarks on your credit report
Foreclosures and bankruptcies can significantly impact your credit score. A big dip in your credit score could be the result of a recent foreclosure or bankruptcy.
In most cases, this kind of mark on your credit report will have a large negative effect on your score. Unfortunately, the effects could impact your credit score for years.
Why did my credit score go down when nothing changed?
Maybe none of these factors apply to you and you're wondering "Why did my credit score go down when nothing changed?" Well, there is a possibility it happened at no fault of your own. Here are some reasons for what could have caused it.
Being a victim of identity theft is one of the worst reasons there is a drop in your credit score. If this happens, people are able to use your identity to apply for loans such as credit cards, open utility accounts in your name, and even steal your tax refund!
That's why it's important to monitor your credit regularly so you can ensure everything on it is ligament. If someone is racking up debt and not paying bills in your name, it can be detrimental to your finances.
An error on your credit report
It's sometimes possible that creditors made an inaccurate report to the credit bureaus in error which in turn impacts your score. Just because they are massive companies doesn't mean they don't make mistakes. As soon as you identify an error, be sure to contact the reporting company that provided the information provided as well as the credit bureaus so you can get it corrected.
Credit limit was reduced
Another reason you could have a drop in your score is if a credit limit was reduced due to lack of use or due to changes in your credit. This could reduce your overall debt to credit ratio, which in turn could impact your score.
You can contact the company to ask why they decreased your limit and possibly have it restored if possible. Also, as you pay down the balance, it will improve your score, so work on getting out of debt and paying off your card every month.
Free resources to monitor your credit score
Whatever the reason for the recent drop in your credit score, don’t worry! There are many ways to improve your credit score. The best place to start is by regularly monitoring your credit score. We have two favorite resources that will allow you to monitor your credit report for free:
Credit Karma is a user-friendly site that will send you helpful alerts about your credit score. If there is a drop, then you’ll be able to act quickly. With Credit Karma, you’ll have access to your credit score and credit reports from two of the three major credit bureaus.
The reports are updated weekly, so you’ll be able to check your credit report whenever you’d like to.
The name gives away the services offered by this site, you’ll be able to see a credit report every 12 months. With this free credit report, you can check to make sure all of your information is accurate each and every year.
Both of these options are trusted and useful ways to monitor your credit score. Take a minute to consider these options and make a decision on which option will work best for you.
4 Ways to improve your credit score
If you’ve noticed a recent drop in your credit score, then rebuilding your credit might be a top priority. Luckily, it is completely possible to rebuild your credit.
As you improve your credit score, you’ll unlock better loan terms and rates for big purchases such as a home or car. Better loan terms can result in thousands of dollars of savings over the lifetime of your loan.
If you implement the strategies below, then you might be surprised how quickly your score can rebound. Let’s take a closer look at the best ways to start improving your credit score.
1. Pay down revolving debt balances
Revolving debt that is associated with lines of credit that you can access with ease, such as your credit card or your home equity line of credit. Each month, you can potentially increase or lower the amount of this revolving debt.
These loans are different from installment loans, such as a personal loan with a scheduled repayment timeline and monthly payment. If you’ve allowed your credit card balances to grow, that will likely have a negative effect on your credit score causing it to drop.
The solution is to pay down your debt as soon as possible. Although becoming debt-free can be a challenge, it is completely possible to pay down your debt.
Consider using the snowball method to kickstart your debt repayment journey. Along the way, you may need to consider picking up a side hustle to increase your income or meal planning to stay on budget.
As you start to pay down your debt, make sure to celebrate the small wins. Every dollar you pay down is progress on your journey. It may not be an overnight path but every step you take will bring you closer to being debt-free. Plus, you’ll likely raise your credit score in the process.
2. Make on-time payments
Lenders value borrowers that can consistently make on-time payments to their debts. In fact, making on-time payments is one of the fastest ways to improve your credit score. One way to consistently make on-time payments is to automate your finances.
Automation can be the key to managing your money efficiently. You’ll no longer need to worry about whether or not you remembered to pay your bills. Instead, all of your debt payments will be made on time without any headaches for you.
3. Credit builder loans
A credit builder loan is a surefire way to improve your credit score if you are able to make on-time payments. If you take out a credit builder loan, the loan amount will be held in a bank account until you pay off the loan. Over the course of the loan, you will make on-time payments that the lender reports to the credit bureaus.
The payments you make along the way will include both principal and interest. At the end of the loan term, you will receive the money that the lender has been holding in an account for you. You’ll be able to build your credit score and your savings at the same time.
4. Take our free course on how to build good credit
Since a good credit score can save you thousands of dollars, it is vital to take action If you want to learn more about the ins and outs of building credit, then our free "Build Good Credit" course is a great resource.
You’ll learn more about the factors that affect your credit score. Additionally, you’ll learn more about specific action steps that you can take to improve your credit score.
If your credit score drops, know that you can improve it
A good credit score can unlock better loan terms for the big purchases in your life. With better loan terms, you can potentially save thousands of dollars over the lifetime of these major purchases, such as a home. Remember, at the end of the day; it's all about using credit wisely.