7 reasons for your drop in credit score (and how to fix it)
You have just had the unpleasant experience of seeing your credit score drop.
Since no one likes to go back, a drop in your credit rating is both frustrating and stressful. This can have a serious impact on your life as you might have a harder time qualifying for the best credit cards or getting the best personal loan rates.
This is why it is essential that you understand what happened to your credit and how to correct the problem. Here are all the possible problems that could have caused your credit score to drop, and how you can fix them.
1. Your balances are too high
If you’ve recently charged more on your credit card than usual, or used it for a large purchase, it may increase your credit usage. Credit usage is 30% of your FICO® score, and your card issuers report your balances every month, so it’s a factor that can quickly change your credit score.
Your credit usage is simply your combined credit card balances against your combined credit limit. Let’s say you have $ 1,000 in available credit and $ 700 in balances. This would put your usage at 70% which is considered too high and will hurt your credit.
How to fix it – Reduce your credit usage to 30% or less (the lower the better) and you will quickly increase your credit score. Here are three ways to do it:
- Pay off your balances.
- Ask your card issuers to increase your credit limits because more available credit reduces your use of credit.
- Open a new credit card. When his credit limit is added to your credit report, it will increase your available credit.
2. You have closed a credit card
When you close a credit card, you will have less total credit available because that card’s credit limit is removed from your credit report. This means that if you carry balances, they will represent a larger portion of your total credit, leading to an increase in your credit usage.
Another problem with closing a credit card is that the average age of your credit accounts might go down. This is a smaller part of your FICO® score, but it still counts for 15%.
How to fix it – Check your credit usage and reduce it if it has gotten too high, either by paying off balances, requesting credit limit increases, or opening a new credit card.
While there’s no quick way to increase the average age of your credit accounts, you can at least avoid applying for new credit accounts until your score has improved.
3. You missed a payment
Your payment history is the most important part of your FICO® score, accounting for 35%.
It is important to note here that missed payments only count for you if they are at least 30 days late. Between zero and 29 days late, the creditor may charge you late fees, but they cannot report your account that late to the credit bureaus.
How to fix it – Get that missed payout right away, because your score will keep dropping the longer you wait.
Set up automatic payment or payment reminders on all your invoices to make sure you never miss a payment again. It may take over a year for your credit score to recover after a missed payment, but any additional missed payments will waste even more time.
4. You have requested a new loan
Any request for new credit, whether it’s a credit card, line of credit, or loan, leads to a serious investigation of your credit report. Each difficult survey can lower your score by a few points, although it is not much.
How to fix it – There is no work for you to do this time, as tough applications only affect your credit for one year. A difficult survey will not cause your score to drop so badly.
You’ll want to avoid any further credit requests, however, so your score can recover.
5. You had an account reported to collections
A collection account can wreak havoc on your credit. The original creditor will report that you haven’t paid, and then the collection agency buying the debt will report it to the credit bureaus as well.
If you had a great credit score to begin with, a collection account could easily drop it by 100 points or more.
How to fix it – First of all, verify that it is a legitimate debt. Otherwise, you can dispute it with the creditor and the credit bureaus who have the debt listed on your credit report.
Collection accounts can damage your credit for years, but you may be able to negotiate what is called a “payment for deletion” with the collection agency. Simply put, you are letting the agency know that you will only reimburse the account if they agree to remove it from your credit report.
Not all collection agencies will take this and the credit bureaus frown, but it’s worth it.
6. There is an error in your credit report
This drop in credit score is not necessarily your fault. If there is an error in your credit report, it can lower your credit score. Mistakes are more common than most consumers realize, which is why monitoring your credit is so important.
How to fix it – Request your credit report from each of the three major credit bureaus. You are legally entitled to one report from each office per year, free of charge. See which of these three cases has the error, then report it through the online dispute process offered by each office.
For a step-by-step guide to disputing an item on your credit report, here’s how to do it with Equifax, Experian, and TransUnion.
To stay on top of changes to your credit report, you should pull your credit reports at least once a year. You can also sign up for a free credit monitoring service for immediate notification of any changes.
7. You have repaid a loan
If you’ve done a double take for this one, you’re not alone. As backwards as it sounds, paying off a loan can hurt your credit.
The reason is what is known as your credit combination, responsible for 10% of your FICO® score. It is better to have a more diverse credit mix. For example, two credit cards and an installment loan, such as a personal loan, would be better for your score than three credit cards.
If you are paying off your one installment loan and only have credit cards, it can impact your credit score.
How to fix it – Keep credit usage low and make all your payments on time. You can borrow another loan, but it’s only worth it if you really need it. It’s not worth paying interest to give your credit score a little bump.
Get your credit score back in shape
Taking care of your credit is one of the smartest financial decisions you can make. There are many ways your credit score can go down, some are more serious than others, but they can all be fixed if you know what you are doing.
If your credit score has recently declined, start by determining what is the cause. Then follow the steps above to resolve the issue.