Why Did My Credit Score Drop?
Published by Alice
There are many reasons that a credit score can drop. Some of the reasons are obvious, while others are subtle. In some cases a credit score can drop far, while at other times a credit score may only drop a few points for reasons that escape the consumer. The following are things that can affect a consumer’s credit score in ways that may not be obvious. Keep in mind that some of these causes can influence a credit rating more than others.
One Late Payment
Although most people are aware that late payments can bring down a credit score, it only takes a single payment for this to happen. Often a person will make a late payment and forget that it happened. Later, when looking at their credit score, they discover that it has dropped, but they forgot about the late payment. This can happen because there can be a significant delay from the time of the late payment until the time it affects a credit score. It’s also true that people think that a payment needs to be more than 30 days late before it is reported to a credit agency, but this is determined by the policy of the lender. Many consumers believe that as long as the account did not go over 30 days, it will not be reported. Later, when their credit score drops, they don’t understand that it was a late payment that was responsible for the drop in the score, even though the late payment was not over 30 days.
A Large Purchase on Credit
Even when a person is making all of their payments on time, a credit rating can drop because of a large purchase on credit. Part of what makes up a credit score is the factor of the percentage of debt a consumer has relative to the total credit available. For example, if an individual has a total amount of credit available of $10,000 and has an outstanding balance of $1,000, their balance represents 10 percent of their total credit limit. If a person were to suddenly add a purchase of $2,000 to his or her total debt, this would bring the percentage to 30 percent. Going from 10 to 30 percent may be enough to drop an individual’s credit score.
A Change in the Type of Debt that is Owed
A mortgage is not given as much attention in factoring a credit score because it is considered investment debt. Most people who are paying on a mortgage have a home that is worth more than the amount owed on the mortgage. However, other types of debt are treated differently. Loans secured by collateral show good credit worthiness, but when a consumer has a lot of unsecured debt, such as credit cards, then the debt can lower your credit score. Open credit accounts should reflect more than credit cards, or a credit rating can be penalized. This is especially true when an unsecured account reaches its credit limits. Once this happens, a credit score may dip downward, if only slightly.
Closing an Account
Most people wouldn’t think that closing
an account that goes unused would hurt a credit rating, but it can happen. The reason is that one of the factors in calculating a credit score is the amount of time that an account has been open. This is calculated on all open accounts to give an average length of time that all accounts have been open. The longer the time, the better it will reflect on a credit rating. The problem for many people is that they will have an old account that is no longer used, so they decide to close it. After all, if it is not being used, there is no reason to keep it open. However, this is not true. Once the old account is closed, the average amount of time that all accounts have been open may drop, and this will lower the credit score. This is a common reason for a credit score to drop for people, when there is no apparent reason for a score to drop. As a general rule, old accounts should not be closed, even when they are no longer being used.
Too Many Inquires
Every time someone checks a person’s credit, there will be an inquiry listed on a credit report. There is little, if any, information to accompany this notation. Of course, everybody who applies for credit is going to have an inquiry, and this alone will not affect a credit rating. The problem is when there are several inquiries on a credit report in only a short time frame. This is a red flag, and it makes it looks like that a consumer is desperate to find credit from several sources. This usually won’t drop a credit score greatly, and when it does, it will usually be only a few points. If this is the only reason for a credit score drop, over time the score will move back up to where it was previously.
This is a big problem with credit scores, and is one of the main reasons why consumers need to check their credit reports once a year. It is also a good idea to check a credit report before shopping for a major loan such as a car or a mortgage. An individual’s credit rating can drop slightly or even greatly due to inaccurate information on the report. It is possible that a lender has reported the correct information to the wrong account, and in this case, the lender will need to be contacted to have the information removed. In more sinister situations, a person’s identity can be stolen. A credit report can show a delinquency on loans that were never taken out. It was simply a case where a person’s identity was used without them being aware. It is also possible to have credit cards stolen, and then used without a person’s knowledge. This can happen with accounts that are not used often.
It important to keep in mind all of the factors listed above, so a credit rating can be kept as high as possible. Lower credit ratings mean spending more money over time when anything is financed, and in the case of a mortgage, this can mean 30 years.