Why Did My Credit Score Go Down?
Credit scores seldom stay the same, fluctuating all the time is normal. If you notice a drop in your credit score, there are a number of explanations as to why it has dropped. It is not something to be concerned about.
Many factors can affect your score like defaulting on loan repayment or even being approved for a new loan or new credit card.
Let’s take a look at 6 reasons why your credit score may have dropped:
1. You Have Missed A Credit Payment
The most important part of your credit score is your payment history, which is responsible for around 35% of your score. It is important to make sure you are never late or miss any payments as even one time can affect your score.
Up to 30 days late on a payment will likely bring your score down slightly, but if you default on payments for 60 or 90 days, your score will experience a greater drop. If you do not eventually pay off these late installments, your debt will be sent to a collection agency and this is recorded on your credit report, reducing your score.
These records are kept on your report for up to 7 years. To avoid a drop in your credit score like this, ensure that you pay all your debts in a timely fashion.
2. Closing A Credit Card
You might think that closing a credit card that you no longer use would improve your credit card for obvious reasons. However, when you close a credit card its history is removed from your credit report which may shorten your credit history, decreasing your score.
Since the length of your credit history accounts for 15% of your score, a longer credit history can improve your score. Should the fee to keep the credit card open become unaffordable, rather take the hit on your score, since defaulting on payments will negatively affect your score more than closing a credit card.
3. Making a Large Credit Card Purchase
If you max out your credit card for a large purchase, like a TV or some furniture. Depending on your current limit, when you make large purchases, your credit utilization ratio will increase. This ratio is an important factor contributing to credit score, and the higher it is the less attractive it looks to lenders.
A high credit utilization ratio is calculated based on your current credit balances and credit limits. If your ratio percentage is too high, it is clear that you are not able to take on more debt.
4. Recently Applying for a New Credit Card, Loan or Bond
When you apply for new credit, lenders check your credit report to determine if you are a responsible lender. Every time someone other than yourself checks your credit score and report, it is recorded on your report. The more times your report is checked, the more likely your score is to drop.
As time goes on, it is normal for your report to acquire a few inquiries, which won’t affect your score too drastically. However, many applications for credit in a short period of time can lower your score.
A single inquiry can cause your score to drop temporarily, but it should recover relatively quickly so long as you don’t apply for new credit within the following year.
5. A Credit Limit Has Been Lowered
If your credit limit is lowered, it has pretty much the same effect as maxing out a credit card. It increases your credit utilization ratio, resulting in a decrease in your credit score. Whether your balances increase or your limits decrease, it has the same effect on your credit score.