We love a good surprise. An unexpected visit from an old friend… a nice bonus in your paycheck… a special gift just because… But there’s one surprise you’re never happy to get – seeing your credit score drop!
There are only a few reasons why your credit score will drop. If you see your credit score drop, especially if it catches you off guard, you should investigate right away to see what caused the decrease.
Here are the 4 main reasons you may see your credit score drop… and what you can do to bring your score back up.
Late payments and other negative remarks
The most common reason you will see your credit score drop is when late payments or other negative remarks are posted to your report. Believe it or not, one new 60-day late payment can have the same effect as a 6-month old bankruptcy!
A new collection account, debt-related judgement, or tax lien can have similar effects.
If you do not recognize the account or the creditor posting the negative remark, or believe the information presented is inaccurate, contact the creditor immediately to question the information. If the creditor cannot (or will not) correct the information, you can send a validation request letter to the credit reporting company on which you found the negative remarks.
If the credit reporting company replies that the information is accurate, but you still believe it is not your account, please feel free to contact us for assistance. Sometimes having a little “muscle” behind your validation requests can help a lot!
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Another common reason you may see your credit score drop is when your utilization ratio changes.
Each of the credit reporting companies calculate your utilization ratio by looking at how much money you owe in total to your creditors compared to what your credit limits are. In other words, it is a measure of how maxed out your accounts are. The lower your utilization ratio, the more positively this factor will affect your credit score.
So… if you recently took on a new auto or student loan, made a big purchase on one of your credit cards, or financed something pricey like a new washer and dryer, your utilization ratio will rise causing your credit score to take a hit.
The good news is there are a few ways to help improve your utilization ratio.
The most straight forward is to pay down some of your balances. We recommend you aim to keep your credit card balances below 7% of your total credit limit. (So if you have a $1500 limit, you would keep your balance under $105.)
Another way to improve your utilization ratio is to open a new line of credit to increase your total available credit. You may see your score dip a little right after you add the new account, but that effect will be short lived. Keep the new card on a zero balance for the largest effect on your utilization ratio. (You can use the card – just make sure you pay it off each month.)
A final way to improve your utilization ratio is to become an authorized user on someone else’s credit card account. Just be sure that person has a HIGH credit limit and a LOW balance for that card. You never actually have to use the card for this to work. Becoming an authorized user on a family member’s credit card can be a tricky subject… read this article for some tips.
Average age of accounts
One of the main factors in how credit scores are calculated is the average age of your accounts. The longer your credit history, the better your score can be. So, when you close an old account (or it is closed by the creditor due to inactivity), your can see a significant drop in your credit score.
Once an account is closed, it is very unlikely that you can have it reopened. But, going forward, pay attention to your older credit accounts. If you no longer have a card to access the account, contact the creditor and ask for a new one. Then use the account a few times a year (and pay it off!) to keep the account in active status. Protecting your older accounts is a valuable way to maintain the length of your credit history.
Any time you apply for credit or financing… apply for a new apartment lease… rent a car or moving van… get a new cell phone contract… or even apply for certain jobs… someone will do a hard inquiry on your credit file.
“Soft Inquiries” do NOT affect your credit score. They occur when you check your own credit or a company checks your credit to see if you qualify for one of their special offers.
But “Hard Inquiries” do affect your score. The effect may be small, and short lived, but if you apply for several new lines of credit in a short period of time, these small effects can add up to a larger drop in your credit score.
One exception is when you are rate-shopping for a mortgage, auto loan, or other kind of financing. If you apply for prequalification from several different lenders for the SAME kind of loan and concentrate those applications into a period of 30 days or less, the FICO credit scoring model is smart enough to recognize this a “rate shopping” and not cause an excessive drop in your credit score.
If you see your credit score drop and notice a series of hard inquiries on your credit file you do not recognize, you may be a victim of identity theft.
Contact the credit reporting companies right away (There is a great list of resources at the bottom of this page from Equifax) to request a credit fraud alert and ask for assistance. You may also want to contact your bank and other creditors directly to alert them of the possible fraud.
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f you have any questions, please give us a call at 770-952-5168 or contact us online.
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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.