6 Reasons Why Your Credit Score Dropped

Your credit score is your magic wand in the finance world. You struggle hard to keep it high. However, despite the effort you put into maintaining a high score, there could be unforeseen circumstances that bring down your credit score all of a sudden.

Don't worry; it might not be your fault. Let us discuss a few instances that could lead to such a situation.

Factors Responsible For Credit Score Drop

There could be innumerable reasons for your credit score to drop. Let's discuss the most crucial ones:

• Your credit utilization rate could have increased.
• You could have missed a payment on one of your credit accounts.
• A disparaging remark could have been added to your credit report.
• You may have closed an old credit account.
• You may have paid off your loan.
• You may have recently applied for a new loan or credit card.
  

Increase in Credit Utilization

This refers to the percentage of your credit limit that you are using. It is a high-impact factor when it comes to calculating your credit score. You can calculate your credit utilization rate by applying the following formula:

(Credit Balance/Credit Limit) * 100 = Credit Utilization%

Your credit utilization rate tells the lenders how reliable you would be with a loan. Low credit utilization is the best for maintaining a high credit score. It shows that you are keeping your expenses within limits by using only a small amount of credit. A low utilization rate, not exceeding 30%, is considered best for your credit score.

A high rate of credit utilization will bring down your credit score, as it indicates that you are overspending and might not be able to pay your bills on time. If you don't manage to repay on time, you end up paying a higher rate of interest. Hence, you would end up repaying more than what you had actually borrowed. Your funds would gradually deplete, leaving you with less money in your pocket.

What if your credit utilization rate is way above 30%? Don’t worry. It's not too hard to bring down your credit utilization ratio. You could reduce your expenses, pay off some outstanding credit bill, increase your credit limit, or even get yourself a new credit card. You can track your credit utilization rate on a regular basis for free at mymoneykarma.

Did you know that you can get a free credit report once a year from credit bureaus? With this credit score report, you can see whether you have any debts, and which ones demand your attention. This way, you can prioritize your finances.

Missing a Payment

Missing your credit card or loan payment is off the table in the finance world. It can bring down your credit score drastically. Your credit score indicates how trustworthy you are with credit, right? If you miss even one single payment, you prove that you are unreliable. Additionally, it incurs a high APR. In short, missed payments damage your credit health in the worst possible way.

Always repay the owed amount on time. Try your best to pay the amount in full. Set up reminders and autopay to avoid this mistake in future. Don't get too disheartened by the drop in your credit score. Henceforth, ensure that all payments are made in a timely fashion. Your credit score will gradually improve. Read this article for a few good tips on this.
Receiving a Negative Remark

Serious delinquency or an 'account in collection' can reflect as a derogatory remark on your credit report, and can cause a sharp drop in your credit score. If you spot a derogatory remark, you should take care of it immediately. These remarks tarnish your creditworthiness and you must act accordingly to get them removed at the earliest.

Account Closure

You might have some old credit card accounts charging an exorbitant subscription fee or an unreasonably high APR. A quick solution to all of these problems would be to cancel the cards and close the accounts. However, it isn't a constructive solution, as your credit score will take a blow.

The age of your credit history impacts your credit score. Bidding adieu to your oldest credit card results in a sharp drop in your average age of credit history and severely impacts your credit score. It also cuts down your credit limit and causes a hike in your credit utilization rate; hence your credit score takes a hit once again.

However, it doesn't mean that you can never close an old account. Just be careful if you ever plan on it - evaluate the pros and cons before taking action.

Paying off a Loan

This one is indeed strange. That feeling of satisfaction and relaxation when you finally settle a loan isn’t a relaxation in the financial world. You need to have a variety of accounts for maintaining a good credit score. If you pay off a loan, the loan account is closed and you lose an account, making your credit score drop inevitably.

It is better to have different types of accounts running. Keep a good mix of credit accounts and loans if you want to maintain a consistent record of credit score. It indicates that you responsibly manage your finances. Lenders thus consider you to be a creditworthy candidate.

I am not asking you to refrain from paying off your outstanding credit. Before you open or close an account, you must check your credit score report, inspect the distribution of all your open and closed accounts, and then respond accordingly.

Hard Inquiry

When you apply for any new line of credit, the lenders run a check on your credit score report to check if you are creditworthy. These inquiries are known as hard inquiries.

Whether you apply for a new credit card, a loan, an internet connection, a phone connection, or a new rental apartment - all these can and will amount to a hard inquiry. Upgrading your credit card or applying for an increase in credit limit can also result in the same.

The bottom line is that any credit check is treated as a hard inquiry as it indicates that a lender has reviewed your credit score because you have applied for credit. Too many hard inquiries reflect your desperation for credit, and potential lenders might question your ability to handle more of the same.

Each hard inquiry leads to a drop in your credit score. In case you find an unauthorized hard inquiry, this article can answer your queries.

4 Reasons why your credit score dropped - Why Did My Credit Score Drop?

I have always been particularly keen on keeping an eye on my finances — I have never missed a payment, my accounts are in good shape, and I always keep my credit utilization within 30%.

Why Did My Credit Score Drop?
There can be a few surprising but very pertinent reasons for a sudden fall in your credit score. Let us dig deep into them.

1. Old and Inactive Accounts

Have you ever found an interesting promotional offer in a shopping mall or a  retail outlet and applied for a credit card? Well, I did at some point in time. And being my ever-forgetful self, I had conveniently forgotten about it.

2. A New Hard Inquiry

My mobile phone connection was pathetic, and I had decided to switch over to a different teleservice provider. A gentleman from the new phone company visited my house to get all the paperwork done. There were a handful of forms to be filled, read, and signed. As I was running late, I had blindly signed wherever the person asked me to. Unknowingly, I had permitted the company to conduct a credit check to ensure that I have the financial capability to afford their services. In short, a hard inquiry was made without my knowledge.

3. Paying off a Loan

This one was my strangest finding. That feeling of satisfaction and relaxation when you finally settle a loan isn’t relaxation in the financial world. You need to have a variety of accounts for maintaining a good credit score. If you pay off a loan, the loan account is closed, and you lose an account. Your credit score drops inevitably.

4.Being an Authorized User of a Delinquent Account

A few years ago, my grandfather had added me as an authorized user(second account holder) of one of his accounts to help me build my credit score. Unfortunately, my old and forgetful grandfather missed a payment. Since I am an authorized user, credit bureaus include that account in my credit report although I never actually use it.

What is my Credit Score - Impacts on Credit Score

High-Impact Factors

• Credit card utilization: How much should you borrow through your credit cards? Experts recommend that you shouldn't exceed 30% of your available credit limit. A low rate of credit utilization indicates that you spend responsibly. It also suggests that you are more likely to repay the loan on time. Additionally, keeping a substantial buffer on your credit limit also helps you in times of crisis or financial emergencies.
• Payment history: Pay your bills on time. By doing so, you let lenders know that you are reliable and that you ensure timely repayment of credit. If you miss a payment, your credit score could fall significantly.
• Negative remarks: Your credit reports must be free of any disparaging remarks. This includes accounts in collections, bankruptcies, as well as foreclosures.

Medium-Impact Factors

Age of credit history: This doesn't refer to your actual age. Rather, it shows how long you have been managing credit. You will be considered more worthy of getting credit if you can prove that you have been maintaining your credits responsibly for a longer period. To sum it up, avoid closing your oldest credit card account, as it might drastically bring down your credit score.

Low-Impact Factors

Total accounts: This doesn't just refer to your savings accounts. It includes the number of credit cards, loans, or mortgages that you have. A variety of accounts is always preferable, as it shows that you have been trusted with credit by other lenders.

Hard inquiries: A hard inquiry refers to applying for a new line of credit - be it a loan, a new credit card, a rental apartment, or a mortgage. Too many hard inquiries in a short period present you as desperate for credit. It also indicates that several other lenders have refused you the same.


How is My Credit Score Measured?

Not using a beam-balance, for sure! I'm just kidding. It is a complicated fact-based mathematical model - an algorithm to be precise - which evaluates your financial history and comes up with the score. You cannot possibly calculate it on your own.
Are you still confused? Put yourself at ease, as we are here to provide you with the necessary  information to help you maintain a good credit score.

Why Did My Credit Score Drop? - Being an Authorized User of a Delinquent Account

There can be a few surprising but very pertinent reasons for a sudden fall in your credit score. Let us dig deep into them.

Old and Inactive Accounts :
 
Have you ever found an interesting promotional offer in a shopping mall or a retail outlet and applied for a credit card? Well, I did at some point in time. And being my ever-forgetful self, I had conveniently forgotten about it.

An inactive account is of no profit to a lender, and a lender can automatically close it without giving you notice. Also, there’s no standard law to decide on how long your account needs to be inactive for before the lender can automatically deactivate it.

The solution to this problem? Well, I have learned my lesson, and so I have set up my internet bill to be auto-deducted every month from another one of my long-forgotten credit cards. You could do the same. Remember to set up auto-pay so that you don’t miss a single payment.

Although you haven’t applied for a loan or a credit card recently, you might have undergone similar minor changes in your lifestyle that resulted in a hard inquiry. You might have inadvertently permitted your internet service provider, cable company, teleservice provider, and even your landlord to conduct a hard inquiry on your credit report. Upgrading your credit card or applying for an increase in credit limit can also result in a hard inquiry.

The solution to this problem? I have become super vigilant. Now I read documents before signing on them; additionally, I always ask a service provider or a lender if the transaction involves a hard inquiry. If you find an unauthorized hard inquiry, it could be fraudulent activity, and you must take action immediately.