If you’ve ever checked your credit score and seen a sudden, unexplained drop, you know how alarming it can be. Your credit score is one of the most important numbers in your life – it determines how much you pay for car insurance, whether you can borrow money, and even where you can live. So if your credit score takes a sudden dive, it’s only natural to start panicking.
But before you start tearing your hair out, take a deep breath and relax. In most cases, there’s a perfectly good explanation for why your credit score has gone down. We’ll run through some of the most common reasons why your credit score might have dropped and what you can do about it. Keep reading to find out more.
Reasons Your Credit Score Dropped
1. You’ve Missed a Payment
One of the quickest ways to see your credit score drop is by missing a payment – whether that’s on your mortgage, your car loan, your credit card bill, or any other kind of debt. If you miss just one payment, it can stay on your credit report for up to seven years and seriously damage your credit score.
If you think you might have missed a payment, check with the relevant lender straight away. They might be able to work out a payment plan with you or give you some extra time to make the payment. Either way, it’s always best to get in touch as soon as possible rather than ignoring the problem and hoping it will go away on its own.
2. You’ve Maxed Out Your Credit Card
If you’ve maxed out your credit card – or even come close to maxing it out – that could also cause your credit score to drop. That’s because when you’re close to hitting your credit limit, lenders see you as being more of a risk. They worry that you might not be able to make your payments if an unexpected expense comes up.
If this is the case, try working on paying down your debt as quickly as possible. You might also want to consider transferring some of your debt onto a 0% balance transfer credit card so that you don’t accrue any interest charges while you’re trying to get out of debt. Just make sure that you don’t miss any payments during the intro period!
3. You’ve Recently Opened Up Several New Lines Of Credit
Have you applied for any new lines of credit recently? If so, that could be another reason why your credit score has dipped. Whenever you apply for a new line of credit – whether that’s a mortgage, a car loan, or even just a new store card – lenders will do what’s called a “hard pull” on your credit report.
This hard pull can lower your credit score by up to five points. So if you’ve applied for several lines of credit in quick succession, that could explain why your score has taken a hit recently.
4. You Have Too Much Debt
If your debt-to-income ratio is too high, that could be having an impact on your score. This ratio is calculated by adding up all your monthly debt payments and dividing them by your pre-tax income, and ideally, it should be below 36%.
So if you’re trying to boost your scores, one thing you can do is work on paying down some of your debts so that this ratio starts to improve.
5. You Co-Signed For Someone Else’s Loan
If someone you co-signed for defaults on their loan, that will show up on both of your credit reports and drag down both of your scores accordingly. Unfortunately, there’s not much you can do about this one other than hope that the person you co-signed for is able to get their act together and start making timely payments again soon.
6. There’s An Error On Your Report
Sometimes errors do happen, so if you suspect there might be an error on your report (like an account that doesn’t belong to you), reach out to the relevant creditor or the credit reporting agency right away so they can correct it as soon as possible.
7. The Balance On One Of Your Credit Cards Is High
Your credit utilization ratio – which is the percentage of your total available credit that you’re using – is one of the biggest factors in determining your credit score. If you have a high balance on one of your cards, it will drag down your ratio and could lead to a decrease in your score.
Try to keep your balances below 30% of your total available credit limit across all of your cards combined.
8. Your Accounts Are Going Through Collections
If any of your accounts are sent to collections – which happens when you stop making payments on a debt and it’s turned over to a third-party collection agency – it will show up on both your and the collection agency’s credit reports and will damage both yours and the agency’s scores.
To avoid this situation, try to negotiate with creditors before an account goes into collections by asking them to lower interest rates or monthly payments or by offering to pay off the debt in full if they agree to remove it from collections.
9. There’s Been Economic Volatility
The current state of the economy can also play a role in how individuals’ credit scores fluctuate. For example, during an economic downturn like we’re currently experiencing, more people may miss payments or become delinquent on their debts, causing averages scores to tick downward
Tips For Improving Your Credit Score
Here are 6 steps you can take to boost your credit score:
1. Check your credit report regularly.
One of the best ways to improve your credit score is to check your credit report regularly. By law, you are entitled to a free copy of your credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once every 12 months. Checking your credit report will help you to identify any errors or inaccuracies that could be dragging down your score.
2. Make all of your payments on time.
Another great way to improve your credit score is to make all of your payments on time. Payment history is one of the most important factors in determining your credit score, so it’s important to make sure that you always pay your bills on time.
If you have trouble remembering to pay your bills on time, you can set up automatic payments through your bank or sign up for a service like Mint Bills.
3. Keep your balances low.
Another factor that is used to calculate your credit score is the amount of debt that you have relative to your credit limits (this is known as your “credit utilization ratio”). Therefore, one of the best ways to improve your credit score is to keep your balances low. If possible, try to keep your balances below 30% of your credit limits.
4. Use a mix of different types of credit.
Your credit score is also influenced by the types of credit that you have. Therefore, another great way to improve your score is to use a mix of different types of credit, such as revolving credit (e.g., credit cards) and installment loans (e.g., auto loans).
This shows lenders that you can responsibly handle different types of debt, which can help to improve your chances of getting approved for new lines of credit in the future.
5. Avoid opening too many new accounts at once.
When you open a new line of credit, it can temporarily lower your credit score because it increases the number of “hard inquiries” on your report. Therefore, it’s best to avoid opening too many new accounts at once.
If you need to open a new account, try spacing out the applications over a period of several months instead of applying for everything at once.
6. Keep old accounts open and active.
Finally, one last tip for improving your credit score is to keep old accounts open and active even if you no longer use them. This helps to improve your “credit age”—the length of time that you have been using credit—which is another factor that lenders consider when making lending decisions
A drop in credit score can be alarming, but it’s usually nothing to worry about – in most cases, there’s a perfectly innocent explanation like one of the ones listed above. If you’re concerned about your credit score, the best thing to do is check your report regularly so that you can catch any potential issues early on and address them quickly.
And if you see something that looks like an error, don’t hesitate to reach out so it can be corrected as soon as possible. Keep these factors in mind next time your score drops and chances are good that you’ll be able to quickly identify the problem and put steps in place to fix it.