My Score Dropped, Why? Credit scores can drop for many reasons. Since your score is comprised primarily of six key credit components, a drop in your score can usually be traced back to one of those factors. 1. Open Credit Card Utilization Your credit card utilization rate is a snapshot of the total debt you have on your credit cards divided by your total credit limits. Even if you pay off your credit cards in full every month, debt will still be reported to the bureaus. If you want to keep this factor from negatively affecting your credit score, keep your credit card utilization below 30%. Carrying more debt on your credit cards, especially if it tips your credit utilization above 30%, could be the reason why your score dropped. If you had a big month of purchases, but then paid everything off and your spending stabilized, your score should stabilize as well. For the VantageScore , your current usage of credit makes up 23% of your score. For FICO its 30%. Possible Solution: You can pay down debt, take on less debt in the future, or increase your available credit on your credit cards by requesting a credit limit increase from your card issuer. Additionally, if you have been paying your credit cards responsibly, you can open a new credit card, which will also increase your limit. All of these actions will effectively lower your credit utilization rate. 2. Percent of On-Time Payments Your payment history is an important factor in determining your score. If you miss even a single payment, your score will take a hit, especially if youve never missed a payment before. Just one or two late payments will cause your score to drop significantly. For VantageScore, on-time payment history comprises 32% of your credit score, and for FICO its 35%. Possible Solution: Set up an automatic withdrawal from your bank account or set alerts and automatic reminders to keep from missing any payments. Also, if this is your first mistake, and youve paid off the bill, call your financial institution and ask if theyll remove the late payment from your credit history. If youre a long-time customer, they might help you to remove the mark from your credit history and keep it from blemishing your credit report. 3. Number of Derogatory Marks If you experienced a major drop in your credit score, a derogatory mark could be to blame. Tax liens, accounts going into collections, and bankruptcies are among the most serious things that can happen to your credit score. These marks stay on your account for seven to ten years. In your credit score, derogatory marks fall under the payment history category, along with on-time payments. Possible Solution: If theres a derogatory mark that you dont recognize, pull your three, free credit reports from AnnualCreditReport. If you find that these marks are errors, dispute them with TransUnion, Equifax, and Experian to have them removed 4. Average Age of Open Credit Lines The longer you have had credit accounts open, the more creditworthy you appear to lenders. If youve closed an account recently, youve shortened your credit history and your credit score might drop as a result. If, however, youve closed your oldest account, then your score will likely have dropped significantly. Opening a new account will also lower the average age of your accounts, affecting your score negatively. For VantageScore the average age of open accounts is worth 13%. For FICO its 15%. Possible Solution: Before closing an account, check to see how the action will affect your score. 5. Total Accounts While its not the most important part of your credit score, having a good mix of different types of credit shows lenders that you can pay off any kind of debt responsibly. For example, if youve just paid off the only loan you have, your credit mix might suffer as a result. Correspondingly, your credit score might drop to some extent, especially if it was an old account, as paying it off will negatively affect the length of credit history as well when your account changes from open to closed. Possible Solution: Congratulations on paying off your loan! If you want to look at other ways to build your score, check out your free credit report card. 6. Hard Credit Inquiries Any time you apply for a new account, whether its a credit card, an auto loan, or a mortgage, you receive a hard inquiry on your credit report. Normally, one inquiry will only drop a few points off of your score. However, if you have applied for several accounts in a short period of time, you could appear desperate for credit and the damage from those hard inquiries will add up. The one exception is when youre applying in order to compare rates on auto or home loans withing a 30- to 45-day period. Hard inquiries will drop off of your report after two years. For VantageScore and FICO, applications for new credit are 10% of your score. Possible Solution: To avoid unnecessary inquiries, only apply for credit cards that you have a good chance of getting approved for. You can see your approval odds before you apply for specific credit cards by looking at Credit Karmas credit card Approval Odds. Building Your Credit Score Now that you know what might have brought down your credit score, you can avoid these same actions in the future. Good credit health is an important asset and knowing how to maintain it ensures your access to the most desirable credit products when you need.
Posted on: Sun, 19 Jan 2014 00:35:00 +0000
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