Why Did My Credit Score Drop? Reasons and Solutions
It can be very disheartening when your credit score drops. You monitor it, you get excited when it increases, you think you’re on the right path, and then, seemingly for no reason, it drops.
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The bad news is that these things happen and while there is often a way to fix them, it isn’t always quick or easy. The good news is that they never happen without reason and understanding that reason can help to prevent your credit score from dropping in the future.
Why Did My Credit Score Drop?
There are a few reasons why your credit score might have dropped:
There was a Hard Inquiry
Did you apply for a loan or a credit card recently? If so, the lender may have initiated a hard inquiry, or what is also commonly referred to as a “hard pull”. This means that they checked your credit report and left their mark to warn other lenders.
You don’t need to agree to a new line of credit for this mark to show and it can reduce your score by as many as 5 points.
If this was the cause, then it will disappear in 24 months and will no longer impact your score after 12 months. It’s a long wait, but it’s a marginal reduction so it isn’t a major concern.
Your Credit Utilization Increased
Your credit utilization has a huge bearing on your credit score, often more than people realize. Simply put, credit utilization compares the amount of credit you have at your disposal to the amount of credit you have used.
The reason this causes so many issues is that borrowers don’t realize that this score will drop when credit limits are reduced and when credit cards are canceled, and not just when debt increases. For instance, if you clear a credit card debt and then cancel the card, both your debt and your available credit will decrease, potentially canceling one another out.
Keep old credit cards, increase credit limits, and remember that the size of the debt is not the most important thing, it’s how that debt compares to your available credit that matters.
You Missed a Payment
The most common reason your credit score might have dropped is also the easiest to manage. If you meet your repayments every month and keep a close check on your credit report, then this shouldn’t be an issue.
However, mistakes happen, and payments may be missed as a result of banking errors, canceled cards, and incorrect reporting. Find the source of the missed payment and if it’s a mistake, contact your bank/credit bureau to correct it.
You Closed an Account
Not only can closing a credit account reduce your credit utilization score, but it can also impact your credit history. Credit account age counts for 15% of your total score. If you recently closed a line of credit, you may have reduced the overall age of your accounts, thus reducing this aspect of your score.
It may also reduce the variety of credit in your account, which counts for 10% of your score. If you have several credit cards, a mortgage, and a personal loan, then you’re showing lenders that you can handle multiple types of credit and this looks great on your report. If, however, you pay off that loan and the account closes, then your score may take a temporary hit.
The good news is that it’s temporary and what you lose by reducing variety and age you gain by improving payment history and reducing debt.
You Opened an Account
A new account can land you with a hard inquiry, which marginally impacts your score, and it can reduce the average age of all your accounts. More importantly, it has a direct impact on an area that counts as 10% towards your overall score.
This will be more noticeable if you don’t have a lot of credit accounts and the ones you do have are new. If you have multiple accounts, a solid repayment history, and a high score, you may feel it less, but your score will still take a slight hit.
The only way to rebuild after this hit is to wait it out.
Once that account is no longer considered “new”, it will start having a positive effect on your score.
What is a Derogatory Mark?
If your score suffered a significant drop, then it may have been the result of a derogatory mark, which is a serious red flag on your credit report. Derogatory marks rarely happen without your knowledge as they are usually initiated by you or preceded with many warnings and issues:
- Civil Judgement
How Can I Get Rid of a Bad Mark?
If you received a derogatory mark that had nothing to do with you, then you can dispute it. It may be the result of identity theft, which is much more common than you might think. If you initiated bankruptcy or had a foreclosure or delinquency, then it’s a little trickier.
Time is really your only friend here, but you can also work with lenders and collections agencies to try and clear those debts and get back on your feet.
It’s important not to adopt an “all or nothing” attitude. It’s very easy to slip into this mentality and to ignore all your financial responsibilities because of one major blip, but you’ll only regret it a few years down the line when one major red flag turns into many.
What is a Trade Line?
A trade line is simply a record of activity on an account. Every time you open a new credit account, the lender keeps details of the total amount and the repayment dates. This information is then handed to the major credit bureaus who use it to build your credit report and calculate your credit score.
Most lenders report to these bureaus, but it’s not mandatory. There are some secured loans and secured credit cards that do not. If you’re looking to build credit and improve your score, it’s imperative that all activity is recorded, otherwise your hard work will go unnoticed.
Summary: When Your Credit Score Drops
The main thing to consider when your credit score takes a hit is that it’s not the end of the world. If it came unexpectedly, there’s a good chance it’s not significant. Derogatory marks rarely happen without the consumer’s knowledge unless there was some element of fraud at play, in which case they are easily reversed.
As for closed accounts, new accounts, hard inquiries, and credit utilization changes, these can all be remedied in time. Just keep meeting those repayments, don’t go overboard when applying for new credit, and focus on clearing the accounts you have as quickly as you can.