Did you know that a low credit score can affect your entire financial standing?
A credit score is the most determinant factor when it comes to borrowing anything, be it a loan or credit. A good credit score will make people like you more, while a low score will classify you as high-risk.
Knowing that your credit score is dropping is certainly cause for alarm. But maybe you’re asking, “why did my credit score drop?” If you’re noticing a decline in your credit score, this article is for you! Read it to know why your score went down.
Incorrect Information on Credit Reports
One useful credit score tip is checking credit reports for accuracy since any incorrect information can drive a credit score down. Errors or omissions arising on credit reports due to incorrect information can cause scores to dip significantly.
Many errors can happen all the time. This includes identity mix-ups, errors in credit accounts, closed accounts showing as open, incorrect public record information, and incorrect personal information.
Therefore, it is essential to regularly review credit reports and keep an eye out for any suspicious activity.
Missed or Late Payments
Making late or missing payments altogether is a surefire way to drastically lower a credit score. One of the top reasons for reducing or declining credit scores is missed or late payments.
These damage credit scores because they suggest the person is not responsibly managing or paying their debt or bills in a timely manner. When a payment is late or missed, creditors report this behavior to the credit bureaus, negatively affecting the person’s credit score.
Paying bills late or missing payments even just once can have long-term consequences, such as higher interest rates, which leads to more debt and hassle. Therefore, to maintain a good credit score and debt management it is important to pay all bills on time.
Not Using Credit Cards
The credit score is largely based on the utilization of credit. If a person has too many credit accounts open without using them, the credit score will start to fall.
This occurs because lenders view too many open credit accounts as more of a risk to them, as they believe it shows how much of a debtor the person is. Not using credit cards also reduces the average length of the user’s credit history, which is another factor contributing to the credit score.
Not only can not using credit cards result in a poor credit score, but so can not making timely payments or exceeding the limit of the cards. This is why it is essential to use credit cards responsibly, but getting a loan with a bad credit score is still possible. View here for more information.
Paying Off a Large Account
Paying off a large account can cause a drop in credit scores. One of the top reasons is that it lowers the amount of available credit. This can stop balances from continuing to be reported to credit bureaus, which means fewer accounts will show up on reports.
Additionally, paying such an account can be seen as a drastic change in credit behavior, thus negatively impacting the length of credit history. Paying off a large balance can also decrease the utilization ratio, causing FICO scores to drop.
Lastly, certain types of accounts, such as retail collection accounts, can be more penalized when paid in full since their type is deemed riskier to creditors than other types of accounts.
High Credit Utilization
Credit utilization is when individuals use a high percentage of the available credit they have access to. This typically indicates to credit bureaus that the individual is at a greater risk of defaulting on payments. Keeping utilization rates low is important in order to maintain a good credit score.
Additionally, financial situations can also contribute to high credit utilization, such as job loss, medical bills, and other unexpected expenses. Other common reasons for a drop in credit score are paying bills late, missing payments, and running up high balances.
If individuals frequently carry a high monthly balance, even if the payment is made on time, their credit scores can decrease over time. If a person’s utilization rate is high, they could try to lower it by increasing their credit limit or paying down the balance.
Closing an Old Credit Card
Closing an old credit card can have a negative effect on a consumer’s credit score. This is because closing an old credit card involves changing many elements of credit utilization which are key components in calculating credit scores.
Every time a credit card is closed, the consumer’s existing credit ratio of available credit to total debt decreases, as well as their total available credit. This impacts their credit utilization ratio and can result in a decrease in their credit score.
Also, closing an old credit card will also cause the consumer to lose any positive payment history associated with the card. This could also cause their credit score to drop. These factors work together to demonstrate why closing an old credit card can cause a consumer’s credit score to drop.
Applying for Too Much New Credit
Each time a consumer inquires about getting a new loan, a credit report is pulled, and the inquiry is listed. More inquiries that occur within a certain time period can negatively impact credit scores by up to five points each.
Too many inquiries in a short period of time can make a consumer look like a “credit-hungry” type, and creditors can become cautious and potentially deny credit.
Also, consumers who apply for a large amount of credit in a short time period can bankrupt themselves by taking out a large sum of credit all at once to cover the existing debt. This can put an individual over their credit capacity, decreasing their credit score.
The Answer to the Question – Why Did My Credit Score Drop?
In conclusion, the answer to “why did my credit score drop?” can be the result of various things, such as missing payments or taking on too much debt. However, do not panic from reading this credit score guide.
It is possible to take steps to improve your credit score by knowing what caused the drop. Start taking action today and see how easy it can be to improve your credit score.
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