Credit scores rise and fall on a regular basis and for many reasons, which means you shouldn’t jump to any conclusions about either the cause or the cost of this development. In fact, one of the benefits of having access to free daily credit score updates through WalletHub is that you can more closely track how your score changes over time, thus helping you understand what’s normal and what’s cause for true concern.
With that being said, the ability to accurately diagnose and treat any ailment that may befall your credit score is still quite important. Below, we’ve analyzed the 10 biggest reasons why scores have been known to nosedive as well as the actions you can take to stop the descent and take your rating to new heights.
Why Your Credit Score Dropped & What To Do About It
- You Recently Applied For Credit: Yes, simply applying for credit can cause your credit score to dip for a short period of time. The rationale is actually rather straightforward: Applying for credit it indicates that a new account is in the works, which figures to demand a portion of your disposable income, thus decreasing your capacity to take on more debt.Mortgages and auto loans, however, benefit from a so-called “rate-shopping period.” That means all inquiries made within a certain window – up to 45 days – are either considered as one or disregarded from scoring entirely. Credit-card inquiries are considered individually, however, and can affect your score for up to two years.
What To Do: Careful planning is the best way to avoid application-related credit-score damage. Doing your research about the types of products you can expect to qualify for, given your credit standing, will enable you to better target your applications, thereby minimizing how many you have to submit.
If you’ve already fallen victim to this particular pitfall, consistently abiding by the terms of your new account is the best way to quickly overcome the lingering effects of the hard inquiry that led to it – if you got approved, that is. If you were denied, reevaluate your options and perhaps apply for less ambitious terms. And if credit building is your top priority, placing a deposit on a secured credit card is a fantastic fallback option.
- An Old Account Was Closed: The length of your credit history comprises around 15% of your credit score, and it’s typically calculated by simply averaging the age of your open loans and lines of credit. Sometimes the age of your oldest account is used as a proxy, however. It’s therefore obvious why closing one of your oldest accounts, or having expiration and the issuer do it for you, can work against your credit score.
What To Do: If your account is already closed, there’s not much you can do besides manage your finances responsibly and be more thoughtful next time around. In general, you should keep a credit card with no annual fee open for as long as possible. Paying fixed costs to have a slightly more mature credit career probably isn’t worth it unless you plan to apply for a mortgage or auto loan in the next few months.
- You’re Spending More Than Normal: Potential lenders are interested in knowing how much of your available credit you actually use and thus how much risk you pose given the context of your overall ability to pay. The metric used to track such performance, called “credit utilization,” is calculated for each of your credit cards individually as well as for all of them together.Most experts recommend keeping utilization below the 30% mark, but that’s a generality. What really matters is how your utilization compares to that of people in your age group and people with a similar financial profile. If your utilization rises too much (or perhaps even falls too far) relative to those benchmarks or your previous performance, your credit score could certainly pay a price.
Impact: Low to Medium
What To Do: Too-high utilization is likely to be most people’s concern, and the obvious way to reverse such a trend is to focus on budgeting — identifying luxury expenses that you can eliminate and paying down debt, if applicable. Taking steps such as requesting a higher credit limit or paying your bill multiple times per month could help sway the math in your favor as well.
- You Have An “NPSL” Credit Card: Some of the most popular types of credit cards – including Visa Signature credit cards, World MasterCard credit cards and American Express charge cards – have a feature called No Preset Spending Limit (NPSL), which means your credit limit is determined on a month to month basis and will not be disclosed to you. This can obscure the way credit limits are reported to the credit bureaus, thus throwing off credit-utilization calculations and putting your score at risk.
What To Do: Not all issuers relay information about NPSL cards to the credit bureaus the same way. If you have such a card, make sure to first check what impact your issuer’s policies can have on your score. Then, depending on what you find, you might want to replace your current card, try to cut back your spending or do nothing at all.
- You’re 30+ Days Past Due: Paying bills late is probably the easiest way to damage your credit. The good news is that most lenders won’t report you as tardy to the credit bureaus until you’ve missed two consecutive payments (making you at least 30 days late on the first). The bad news is that payment history accounts for roughly 35% of your credit score, making it the largest component of most scoring models. This includes metrics such as your on-time-payment percentage; the number of accounts on which you’re currently at least 30 days behind; the specific number of days your payment is behind; and the amount you owe on delinquent accounts.
Impact: Medium to High
What To Do: You can’t remove a late payment from your credit report, but you can stop the bleeding by making up what you’ve missed – at least the monthly minimums, in the case of credit cards. This will result in the status for the account in question changing from “past due” to “paid.” Diluting the record of this delinquency by doubling down on your efforts to meet monthly due dates should be your next priority. Setting up payment reminders and automatic withdrawals from a bank account for at least the minimum required amount can be a great help to such efforts. For other ideas, check out our 8 Tips For Never Missing A Due Date.
- You Lack Account Diversity: A modest portion – roughly 10% – of most credit scores is reserved for evaluating the types of credit that you use. The thinking is that people with experience using a variety of different financial products, from credit cards to auto loans to mortgages, are more trustworthy. So if you recently paid off your only loan or closed your only credit card, for example, that could be the reason your credit score dropped.
What To Do: You should never take on debt just to please credit-scoring algorithms. That rules out getting an auto loan or a mortgage just for the sake of having it listed on your credit report. But a credit card doesn’t have to cost you anything and will benefit you even if you never use it to actually make purchases. Just make sure to keep one open and in good standing.
- A Derogatory Mark Was Added To Your Credit Report: In addition to delinquencies, derogatory marks include notations in reference to civil judgments for unpaid debts — including alimony and child support — as well as records of bankruptcy and accounts sent to collections. Such records typically reflect significant financial difficulties and have a correspondingly substantial impact on your credit score.
What To Do: The only thing that you can do in this situation, assuming the derogatory mark was warranted, is attend to its underlying causes. That might mean paying amounts owed or seeing the bankruptcy process through to the end, for example. Other than that, time is your main ally. Negative information falls off your credit reports after seven to 10 years, in most cases.
- A Data Furnisher Made An Error: Credit bureaus make mistakes; it’s just a fact. According to the Federal Trade Commission, one in five consumers had an error in at least one of their three credit reports. So it’s entirely possible that inaccurate information was recently added to your credit report, thus explaining your score sliding.
Impact: Low to High
What To Do: The extent of the problem depends on the type of error in question, but the only way to make that determination is to carefully review your credit report. Should you find any mistakes or records that you believe to be suspicious, you can dispute them directly with the credit bureau. Your score would then improve when the inaccurate records are removed from your file.
- A Credit-Scoring Model Was Adjusted: Credit-scoring models change from time to time, so it is conceivable that an adjustment depressed your rating though this is not as likely as other factors to have done so. For example, FICO, which features numerous iterations of its various scores, is set to release FICO Score 9 in early 2016. Your score according to that model will likely differ from how you’re rated based on FICO Score 8, but it could be either higher or lower.
What To Do: There’s not much you really can do if your score falls due to a change in the evaluation criteria. But the best approach is to research how the credit-scoring formula changed, as this might offer some insight into why the new model doesn’t view you as favorably and what adjustments you can make to change that.
- You Fell Victim To Identity Theft: Although the specter of identity theft probably looms larger than its practical impact, it does indeed happen and can wreak havoc on your credit in the process. Identity theft can manifest itself in many ways, such as hard inquiries into your credit history, delinquent accounts that you did not open or changes to your listed address.
Impact: Low to High
What To Do: There are defined identity-theft and fraud-reporting protocols that you can follow if you believe your credit score is being dragged down by identity theft. Double-checking your credit reports and getting in touch with any related financial institutions are high on the list, but they’re not the only steps.
When To Worry About A Falling Credit Score
In credit, nothing is permanent. Even the most serious credit score damage can be overcome in time. That is very important to remember because credit building often is frustrating, yet there is always light at the end of the tunnel for those who are patient. With that being said, here are a few points to consider regarding concern over a sliding score.
- Minor Fluctuations Are Normal: If you check your credit score every single day, as only WalletHub gives you reason to do, you’ll invariably learn it’s not constant. Credit scores are calculated based on a variety of factors, and as these underlying components fluctuate, so too will your score. If, for instance, you spend more or pay less than usual one month, your score might dip a bit. But just as it went down, it will recover as your habits return to normal. In short, it’s important to learn how to distinguish natural rhythms from red flags, and the best way to do that is to monitor your score over time.
When To Worry: It’s fair to say that your credit score falling 40 points should get your attention, while a 100-point drop is cause for serious concern. After all, a triple-digit decrease is emblematic of significant underlying issues and likely means you’ve dropped to a lower tier of the credit spectrum. Swings of a few points either way can be expected.
- You Don’t Need It Until You Need It: One of the most important things to remember about credit scores, especially in relation to them falling, is that they don’t really matter until it actually comes times to apply for a mortgage, auto loan or credit card. Until then, they’re merely instructive.
When To Worry: Make sure to monitor your credit like a hawk and manage your finances as responsibly as possible in the six months before you apply for credit or a loan. There is little room for error during this period given how difficult it is to anticipate recovery times for credit-score damage and how much money is at stake – with mortgages in particular. Should you incur any damage – whether legitimately, fraudulently or erroneously caused – you must take immediate steps to clean up your credit report and quickly maximize your score.
- Your Credit Report Is What Really Matters: All credit scores are based on the information in your major credit reports, so that should be your primary concern. As long as this information is accurate and you are taking all the necessary steps to manage your finances responsibly, you’ll be in good shape in the long run.
When To Worry: If each time you check your credit score it has fallen even farther than the last, worry is certainly warranted. Your main concern in such an instance should be the contents of your credit report. Erroneous or fraudulent records on your file not only stand to bring your credit score down, they can also make it harder to find a job or an apartment. Plus, until you fix the problem at its source, there won’t be much you can do to fix your score.
You can get your full TransUnion credit report for free from WalletHub.