If you are in the habit of monitoring your credit score often or you signed up for credit score notifications, then you know how your credit score changes over time. While you are excited about an increase in your credit score, you are equally alarmed about a drop in your credit score.
The credit score calculation system is very complex and it can be difficult to pinpoint the exact reason for a credit score drop. Your credit score is based on the information in your credit report. Therefore, if your credit score drops unexpectedly, it is usually due to a change in the information in your credit report. And it doesn’t have to be a big change for your credit score. Here are a few possible reasons your credit score might drop.
Your payment is more than 30 days late
Payment history always has the biggest impact on your credit score. Credit card and loan payments that are more than 30 days late are reported to the credit bureaus and are reflected in your credit score. Once the late payment hits your credit report, your credit score will most likely drop.
They made an expensive purchase
Another important factor in your credit score is how much of the available credit is used – your credit utilization. It comes as a surprise to many people but if you make a big purchase on your 1 month credit card you can see a drop in credit score even if you pay the balance in full on your due date.
This happens because the credit card issuers typically report the credit card balance to the last day of the billing cycle. The balance on your credit card statement is often the balance that appears on your credit report.
The good news is that it is easy to correct the effects of a high balance. Simply pay the balance down immediately, avoid making other credit card purchases and waiting. This will help you recover lost credit score points.
Your Unpaid Account War: Collection Sent
To protect your credit score, it is important that you pay all of your accounts, not just your credit cards and loans. If you fall behind on payments to your non-credit accounts (like your monthly phone bill), the bad balance could be sent to a debt collection agency and contained on your credit report. Once a collection shows on your credit report, it will almost certainly drop your credit score.
Your last collection Dropped Off Your Credit Report
When calculating credit scores, FICO places people in different buckets known as scorecards. Your credit profile is compared to other people in your scorecard to come up with your credit score. While you can have a credit card at the top of one scorecard with the collection on your credit report, you can drop to the bottom of another scorecard if negative information falls off your credit report.
This type of credit score drop is out of your control. Fortunately for you, as long as you keep paying your bills on time and keep your debts low, your credit score will improve.
You have a new application for credit
Every time you apply for credit in a new application, a request is added to your credit report. Since inquiries make up 10 percent of your credit score, applying for new credit can affect your credit score.
Inquiries only affect your credit score for a year, so if the only inquiry is you, your credit score should increase steadily and have recovery in 12 months.
One of your credit limits has been lowered
A lower credit limit has the same effect as charging an expensive item. If you have a balance on a credit card with a low credit limit, your credit usage will go up and your credit score will go down.
You closed a credit card or one was canceled
Closing a credit card can hurt your credit score, especially if the card has a balance. Credit card companies can also cancel your credit card, which will not necessarily affect your credit because it was the creditor who closed the account, but because the account was closed at all.
Your bankruptcy fell away your credit report
If bankruptcy drops your credit report after seven years, you will likely move to a new credit scorecard. You could see a drop in your credit score because now your credit performance is being compared to other people who have not filed for bankruptcy.