In a financial world where a credit score will either open doors for you or slam them shut, it can be disheartening to see your credit score suddenly drop. Thankfully, many hits to your credit score are temporary. Here are some things that can lower your credit score and what you can do to recover before things get out of hand.
You Applied For A New Credit Card
Each time you apply for a new credit card, the credit issuer pulls your credit report. They do this because they need to determine if you’re a good or bad candidate for credit. There are two kinds of credit checks – hard inquiries and soft inquiries. Soft inquiries don’t affect your score, but a single hard inquiry can temporarily lower your credit score by a couple of points. These hard inquiries by credit issuers will stay on your credit report for two years, but FICO only takes into consideration the ones from the last 12 months when determining your score.
But don’t let this deter you from opening a credit card account. Having and responsibly using a credit card is one of the best ways to build credit. The credit points you’ll gain from using a credit card wisely will quickly offset the small dip that getting the credit card will cause.
You can limit the number of hard inquiries on your credit by using pre-approval offers. Those offers don’t necessarily guarantee that you’ll get approved for a specific credit card, but you’ll get a good estimate of your chances.
Your Credit Utilization Rate Changed
“Credit Utilization” is the ratio of credit used to credit available. This very important credit utilization rate determines 30% of your overall credit score. If you use most of your available credit amount, your credit utilization rate will increase, and your credit score will decrease.
This can happen easily, particularly if you use your credit card to purchase large household appliances. For example, let’s say you have a credit limit of $10,000. You typically use $1,500 of that amount monthly, giving you a credit utilization rate of 15%. But, if you purchase a new set kitchen appliance one month and wind up using $5,000 of your credit, then your credit utilization rate will jump up to 50%.
The Consumer Financial Protection Bureau suggests keeping this rate below 30% in order to keep your credit score steady. A credit utilization rate higher than that will negatively affect your credit score. Thankfully, this rate is pretty fluid! Either spread out your big purchases or know that your score will take a dip for a little while.
You Missed A Payment
Your payment history is of utmost importance in calculating your credit score. In FICO’s scoring model, it accounts for 35% of your score. Now, late payments happen sometimes. If your payment is late by only a couple of days, you won’t see that reflected in your credit score. However, if you’re late by more than 30 days, your card issuer will report it as a delinquency to the credit bureaus, and your credit score is going to take a hit.
If you’re juggling multiple credit cards and loans, keeping track of all of the payments can be difficult. Thankfully, we live in a world of automatic payments. Enroll in automatic payments to keep your credit score from dipping due to recurring forgetfulness. If this becomes a frequent affair, you’ll notice an even bigger dip in your credit score. It happens to the best of us.
Note – this involves more than just credit cards! Miss payments on non-credit accounts, such as utilities, can also negatively impact your credit score.
You Closed A Credit Card
We all can picture the scene of someone taking scissors to a pile of credit cards. It’s a common vignette in websites and commercials of people climbing out of deep credit card debt. But did you know closing credit cards can actually cause your credit score to drop? This happens for two reasons.
First, closing a credit card will reduce your available credit. Remember the credit utilization ratio – with less credit available to you, your credit utilization percentage will go up unless you reduce your spending.
Secondly, your credit score takes into account the average length of your credit history. The older a credit card account is, the more it will impact your average account age when you close it. If you decide to close some credit card accounts, opt to leave your oldest accounts open.
You Got Moved To A Different Scorecard
Credit scoring models sort people into different groups, known as scorecards when calculating credit scores. Your credit profile is compared with others in the same scorecard to determine your credit score. However, if some type of negative information ages off your credit history, you might move from the top of one scorecard to the bottom of a different one.
This is completely outside of your control. It can be frustrating to see your credit score drop due to an improvement in your account. Keep paying your bills on time, and you’ll see your credit score bound back up.
You Paid Off A Loan
Wait, isn’t that a good thing? Yes! It’s good financial sense to pay off your loans. But, it will affect your credit mix.
Your credit mix accounts for 10% of your credit score on the FICO model. A full credit mix will include various types of loans and various types of credit cards. This shows that you can manage different types of debt.
It’s still wise to pay off your car or student loan, however. Your score will take a dip for a bit, but you can still build a strong credit score without having a full credit mix.