If you check your credit score regularly – and you should – you’ll probably notice that it tends to fluctuate a few points each month. It’s completely normal, and it’s just the product of how credit scores are calculated.
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But, if you see a big and sudden change, you may very well ask yourself, “Why has my credit rating gone down? Sometimes the reason for this can be trivial and your score will likely recover shortly. However, other times your score may drop for a more serious reason and you may need to work hard over time to recover it. Here are the top 10 reasons why your credit score may suddenly drop.
You repaid a loan
Make no mistake: paying off a loan is a great long-term way to improve your credit score and save yourself financial hardship. But, for a short time, you may see a drop in your credit score right after paying off a loan, especially if it’s an installment loan like a home loan or car loan. This is because part of your credit score is based on the combination of credit account types on your report.
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If you pay off your installment loan, it will disappear from your report and you may be left with only credit card accounts. This hurts your credit mix and can therefore temporarily lower your score by a few points.
But don’t let that stop you from making the responsible decision to pay off that debt. Any drop in your credit score is usually only temporary. Over time, all things being equal, your score will recover.
You missed a payment
Probably the biggest — and most common — reason your credit score can drop is if you miss a loan or credit card payment. In many cases, you have a 30-day grace period before your late payment is reported to credit agencies; but, if you violate this threshold, your score will take an immediate hit.
The only way to recover from this type of credit score drop is to continue making timely payments afterwards. However, this is not a magic bullet for making a late payment.
You didn’t pay your credit card bill before the statement was issued
Many Americans are used to racking up charges on their credit card bills, receiving their statements and then making their payments. But it can actually cause your credit score to drop.
Each time you receive a statement, your creditor will send a statement of your outstanding balance to credit reporting agencies. This will reflect on your credit report as your current amount of outstanding debt. But, if you were instead to pay your charges as they accrue — or at least pay them all before your statement date — your creditor will declare your statement balance to be zero.
Even if you pay your balance in full each month after receiving your statement, your credit report will still show that you have an outstanding debt if your monthly statement shows a balance.
You have closed a credit card account
Closing a credit card account can lower your score in two ways. First, if you close one of your old accounts, it will reduce the average age of your credit. Although not a major factor, the age of your accounts is part of the credit scoring formula, so your score may drop if you lower this average.
Second, if you have outstanding balances, closing an account will increase your credit utilization because the ratio of outstanding debt to available lines of credit will increase. This will most certainly hurt your score until you pay off that debt.
You recently put a large charge on your credit card account
A big part of your credit score is your use of credit. The more credit you use against your available credit lines, the lower your score will drop. If you suddenly put a large charge on your credit cards, your credit usage will increase dramatically, which could have a significant negative effect on your score.
This might catch you off guard if you buy a new television, appliance or other product and benefit from the store’s deferred interest financing program, in which you may be able to pay off your purchase over several years at a rate of 0%. interest rate. While this may be financially prudent in terms of avoiding interest charges, it is also likely to increase your credit utilization, thereby lowering your credit score.
You applied for a new loan
Every time you apply for a loan – even if you get rejected or don’t even use the account after your approval – your score will usually take a small hit. Your credit inquiries are logged on your credit report for two years, and while the effect diminishes over time, every rigorous credit check counts against you in the credit scoring model. That’s why it’s a good idea to only apply for the credit you absolutely need. You should also try to avoid making too many inquiries in a short period of time.
You have a new mortgage
There’s nothing wrong with living the American Dream and taking out a home loan. After all, only a very limited number of Americans can pay cash for a home. But you should be aware that your credit score is likely to drop once you take out a mortgage.
For starters, as we saw above, every time you apply for new credit – even a home loan – your score will suffer a bit. But, if you actually take out a mortgage, you’ll probably add the biggest amount of debt you’ll ever have to your report. Add to that the high rate of credit utilization on this loan at the start – as your loan amount will be the same as your available credit – and it’s not uncommon to see a double-digit drop in your credit score. .
Remember that having a mortgage account and regularly paying it on time will actually increase your credit score in the long run.
Your bank has reduced your credit limit
Sometimes a reduction in your credit score is beyond your control. Credit card issuers often reduce credit limits for customers who rarely use their card or show too much existing debt on their credit reports.
However, sometimes they simply reduce their credit limits to reduce their overall risk, often in conjunction with economic downturns. If you have an outstanding balance and your creditor reduces your line of credit, your credit usage will increase, which will negatively affect your score.
You have accepted a debt reduction plan
If you are having financial difficulty, you may be able to reach an agreement with your creditor under which you can settle your debt by paying less than the amount you owe. While it can help get you out of a financial hole, it can also wreak havoc with your credit score.
Every time you settle a debt – even if it’s to avoid worse scenarios like filing for bankruptcy or having your account collected – it’s a huge negative in the credit score model. If you’re trying to preserve your credit score, settling less debt than you owe should be an option of last resort.
There is a mistake
Sometimes, if your credit score suddenly drops, it’s just because of a mistake. Credit reporting errors can range from something simple, like a typographical error that a creditor passes on to agencies, to something more sinister, like a criminal opening an account using your stolen Social Security number.
Either way, if you notice a significant drop in your credit score and haven’t opened any new accounts or made late payments, a credit report error is likely the culprit. That’s why it’s essential to regularly monitor your credit reports.
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