You’ve worked hard to improve your credit score, only for it to drop. Why the sudden change? There are several reasons it could’ve changed, like a late or missed payment, increased credit card balances, or a new account.
This guide explores the many reasons why your credit score could’ve gone down. You’ll also learn what actions to take to help build it back up.
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Why Your Credit Score Dropped: Possible Reasons
Before diving into possible explanations, understand that your FICO® score is made up of five factors:
- Payment history (35 percent)
- Amounts owed or credit utilization (30 percent)
- Length of credit history (15 percent)
- Credit mix (10 percent)
- New credit (10 percent)
Any time your credit score drops, it’s related to one of these categories.
Late Or Missed Payments
Once your loan or credit card account reaches 30 days past due, the delinquency will likely be reported to the credit bureaus. A single late or missed can drop your score significantly and could linger on your credit report for several years. Fortunately, the impact will diminish over time.
Your Credit Utilization Has Changed
If your credit utilization on revolving accounts (i.e., credit cards) exceeds 30 percent, expect your score to decrease. This is because even if you recently paid the balance(s) down on your credit card(s), your credit score may not reflect the correct balance if the creditor hasn’t yet reported it to the credit bureaus for that month.
You Opened (Or Closed) An Account
When you open a new account, it drops your credit age which means your score may go down. The same applies when you close an account. Your credit utilization could also change when you open or close an account since you’ll have more or less available credit across the board.
You Paid Off a Loan
Paying off outstanding debt isn’t a bad thing. However, it could drop your credit score in the short term as it impacts your credit mix.
Recent Hard Inquiry
A single hard inquiry resulting from a credit application may only drop your score by a few points. But if you applied for several different types of accounts in a small amount of time, the impact could be more significant.
You Got a Derogatory Remark
Derogatory remarks on your credit report generally result from charge-offs, collection accounts, bankruptcies, foreclosures, judgments, lawsuits and tax liens. They can remain on your credit report for up to 10 years and can also lead to a drop in your credit score.
You’ve Had a Major Financial Change (Like A Foreclosure or Bankruptcy)
Bankruptcies and foreclosures also mean bad news for your credit score. Once either is reported, they remain for some time and can be challenging to recover from. The reporting timeline for Chapter 7 bankruptcy can be up to 10 years from the filing date. It drops to seven years for Chapter 13 bankruptcy and foreclosures.
Sometimes It May Just Be an Error
Credit reporting mistakes can happen to anyone. However, by regularly monitoring your credit report, you can spot errors that could hurt your credit score right away and file disputes to have them rectified.
You Shouldn’t Rule Out the Possibility of Identity Theft
If there was a significant drop in your credit score, it could be the first sign of identity theft. You can usually confirm that you were victimized by reviewing your credit report for unknown addresses and fraudulent accounts.
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What Can You Do to Improve Your Credit Score?
Fortunately, a credit score drop doesn’t have to be permanent. Here are some potential remedies:
Rebuild Your Credit with a Credit Builder Loan
A credit builder loan is an affordable way to rebuild your credit score, building savings minus interest and fees. But it doesn’t quite work as a traditional loan. Instead of receiving the loan proceeds at once, the funds will be placed into an account, and you’ll make payments over a set period that are reported to the credit bureaus to build a payment history. Once the loan term ends, the funds (minus interest and fees) will be released to you for use however you see fit.
If a credit builder loan sounds like something you’d be interested in, consider a company like Self to get started. It offers through credit builder accounts:
- Small Builder: pay $25 for 24 months and receive $520 at the end of the loan term
- Medium Builder: pay $35 for 24 months and receive $724 at the end of the loan term
- Large Builder: pay $48 for 12 months and receive $539 at the end of the loan term
- X-Large Builder: pay $150 for 12 months and receive $1,663 at the end of the loan term
(Quick note: All new account holders are assessed a $9 administrative fee)
There is no minimum credit score or income requirement, and it only takes a few minutes to sign up for a credit-builder account with Self. Even better, you can get started without undergoing a hard credit check. Download the Self app or visit the website to start building your credit score.
Pay Off Missed Payments
Get current on all past-due accounts to prevent additional adverse credit reporting. Also, call creditors and lenders reporting missed payments and request a goodwill adjustment to have them removed. Of course, there are no guarantees that this approach will work, but it’s worth a shot if the delinquent payment was a one-time occurrence.
Keep Credit Card Balances Low
Pay down your credit card balances and aim to keep them at or below 30 percent of your credit limit. Or you can apply for a credit line increase to help your utilization rate without paying down your debts right away.
Avoid New Credit Applications
Refrain from applying for credit unless you absolutely need it when working to increase your credit score.
Minimize Your Total Debt
Ideally, you want to lower your overall debt load to demonstrate to creditors and lenders that you responsibly handle your finances and aren’t overextended.
Dispute The Derogatory Remark/Error
You have a right to dispute inaccurate and untimely information in your credit report. If the credit reporting agencies decide in your favor, your score could rise once the negative data is removed from your credit report.
Report any Fraudulent Charges
If you believe you’re the victim of identity theft, review your credit report and highlight any unfamiliar items. Next, visit identitytheft.gov and file a report. Be sure to keep a copy as you’ll need to provide it to the credit reporting agencies – Experian, TransUnion and Equifax, when filing disputes. It’s also a good idea to add a fraud alert to your credit profile or freeze it to minimize the chances of another problem.