Tuesday, September 27

Why did my credit score drop?

Any drop in your credit score will be discouraging, but it’s not always immediately clear why your score dropped. The most likely culprits for a decline are:

  • A late payment for more than 30 days
  • A collection account, particularly for non-medical debt
  • Accumulating high balances on all your credit cards
  • Exceed the limit of one of your credit cards

But if you haven’t made any of these obvious mistakes, a drop in your credit score can seem like it came out of nowhere. Our expert Steve Rhode of Get Out of Debt gets it.

“It may seem like there are people in secret rooms armed with darts, roulette wheels or Magic 8-Balls, trying to assess your credit score on a daily basis. Sometimes he falls over and has no idea why,” says Steve. “But there is always a pattern, even if you can’t see it immediately. Your credit score goes down because there is an event that has taken place that – from a creditor’s perspective – makes you appear to be a higher credit risk. You just have to find that hidden reason.”

Aside from the common reasons for a low score that we mentioned above, here are some less common reasons for low credit scores.

#1: You closed an old account and lowered your credit age

Closing an old account doesn’t seem like it should make you a higher-risk borrower. But if you close your oldest account that you kept in good standing, you lower your credit age. Therefore, you appear to be a less experienced borrower.

And realize that you don’t even have to actively decide to close your account for this to happen. If you don’t use a credit card, the creditor can close the account for you due to inactivity. Therefore, please check that all your accounts are still open. Also, find good little uses for old accounts, so keep them open.

#2: You have a new error on your credit report that you need to correct

Credit bureaus and the lenders and creditors who report to them make mistakes. A creditor may have reported that you did not make a payment that you actually made on time. Or they may have reported that you exceeded your credit limit when you were nowhere near it.

So if your good credit scores drops, check your report to make sure you don’t have any new negative items that shouldn’t be there. If you do, start the credit repair process immediately. Once you correct the mistake, your score will be restored.

#3: You are a victim of identity theft

If you didn’t do anything wrong that negatively affected your score, maybe someone else did. If someone got your credit card number, they may have built up a balance in your name. Your Social Security number could also be compromised. You may have new accounts, or new accounts that have already been depleted and have already been sent to collections.

Again, check your credit reports to make sure you recognize all accounts and that there’s nothing new you didn’t expect to see. If there is, it may be time to freeze your credit.

#4: A cosigner or joint account holder affected you

Joint signing is often a risky business. You want to help someone because they have poor credit, so you agree to cosign. But if they don’t pay the debt, you are responsible, and failure to pay will affect your score. If bills don’t reach you or if you aren’t reviewing transactions, then the first sign of trouble could be non-payment on your credit report. This would negatively affect a good credit score.

This can also happen to joint account holders who separate. Even if a divorce decree decides that one partner is responsible for a debt, if the other partner does not withdraw as a joint account holder, he or she could suffer credit damage if the responsible party fails to pay. That’s why you should always take care of joint account changes immediately after a separation.

#5: Paid off a loan

This point sounds a bit counterintuitive. Paying off a loan sounds like it’s good for your credit score. But some consumers have experienced a slight drop in their score after completing a loan payment.

“I can understand why people get confused and even a little irritated when this happens,” says Rhode, “Why would a responsible act like paying off a loan lower your score? The reason has to do with limiting the diversity of your credit.”

Basically, the smallest credit score factor assesses what types of debt you have and the diversity of your debt. There are good debts and bad debts. Good debt is anything that increases your net worth or lifetime earnings potential. When you pay off debt, like mortgages and student loans, you lose good debt and decrease the diversity of your debt. Rhode recommends that you not panic if this happens.

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