8 Reasons Your Credit Score May Have Dropped
If you're in the habit of monitoring your credit score often or you signed up for credit score alerts, then you know how your credit score changes over time. While you're excited about an increase in your credit score, you're 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 information in your credit report. Therefore, if your credit score drops unexpectedly, it's typically because of a change to the information in your credit report. And, it doesn't have to be a big change for your credit score to fall. Here are a few possible reasons your credit score could drop.
Payment history always has the most significant 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.
Another important factor in your credit score is how much of your available credit is being used –– your credit utilization ratio. It comes as a surprise to many people but, if you make a big purchase on your credit card one month, you could see a credit score drop even if you pay the balance in full on your due date.
This happens because credit card issuers typically report the credit card balance as of 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's easy to correct the impact of a high balance. Simply pay down the balance promptly, avoid making other credit card purchases, and wait. This will help you recover the lost credit score points.
Your Unpaid Account Was Sent to Collection
To protect your credit score, it's important for you to pay all of your accounts, not just your credit cards and loans. If you fall behind on the payments on your non-credit accounts (such as your monthly phone bill), the defaulted balance could be sent to a collection agency and included on your credit report. Once a collection shows up on your credit report, it will almost certainly cause a drop in 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 may have been at the top of one scorecard with the collection on your credit report, you may fall to the bottom of a different scorecard if any negative information falls off your credit report.
This type of credit score drop is outside of your control. Fortunately for you, as long as you keep paying your bills on time and keep your debt low, your credit score will improve.
Any time you put in a new application for credit, an inquiry is added to your credit report. Because 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 that's the only inquiry you have, your credit score should steadily increase and recovery in 12 months.
Closing a credit card can hurt your credit score, especially if the card has a balance. Credit card issuers can also cancel your credit card, which will impact your credit—not necessarily because it was the creditor who closed the account, but because the account was closed at all.
Your Bankruptcy Fell off Your Credit Report
When bankruptcy falls off your credit report after seven years (ten years for Chapter 7 bankruptcy), you'll 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 haven't filed bankruptcy.