After years of making timely payments, being disciplined when seeking new credit, and paying down your balances, why all of a sudden might you see your credit score drop by 20, 50 or 100 points? There are many reasons why there can be a slight or even major decline in your credit scores. Since credit scores are with you for your lifetime, remember that they respond continually to your credit and finance-related activities and behaviors.
When you see a score drop, that means something within the scoring calculation has registered recently updated information to deliver the new score. Here are a few components that contribute to many credit scoring models:
- Number of Late Payments
- Number of Inquiries
- Average Age of Accounts
- Number of Open Installment Loans
- Average Credit Card Limit
Knowing that many credit scoring models consider these criteria, ask yourself a few questions about your recent credit activity:
1. What is your current credit card balance?
A traditional rule of thumb dictates that your credit card balance shouldn't exceed one third of its limit. It's recommended that you keep your credit card utilization below 30 percent on each card. These actions collectively show lenders that you know how to spend responsibly, and may help your credit scores. If you've reached or are nearing your max spending limit, the excessive debt from your credit card usage may be lowering your scores.
2. Have you recently applied for a mortgage, loan, or new credit card?
While an extra 20% off your department store purchase may sound enticing, too many new credit line inquires can lower your credit scores. This is also true of mortgages and car loans — one or two will likely not impact your scores significantly, but having several loan inquiries can cause your scores to dip. Lenders may also interpret this activity as an attempt to overspend.
3. Is inaccurate information appearing on your credit report?
Make it a habit to check your credit report regularly. It is possible for mistakes to occur that can lower your credit scores. If something inaccurate is showing up on your report, this could be an indicator that a lender has reported something incorrectly, or that you have been the victim of identity theft. If you need to dispute inaccurate information, do so immediately.
4. Have you missed any payments or had an account sent to collections?
Missed payments can have a large impact on your scores. If you are more than 30 days late on a payment, your credit scores will likely take a hit. When late items go on to be 60, 90 or more than 90 days late, you may see an even bigger hit. Not to mention late fees and increased interest rates! Save yourself money by making payments on time — and by paying down as much as possible, preferably the entire balance due. Making timely payments is one of the easiest things you can do to show you're using credit responsibly.
5. Did you close a credit card you've had for a while?
Did you know that the age of your accounts factors into many credit scoring models? This factor comes as a surprise to many, however, if you have had a credit card for a while (sometimes known as an ‘aged account') and closed the account, this could have caused a drop in your credit scores. If you have demonstrated a solid payment history and responsible use of credit over time, lenders are likely to see you as a lower risk. Pay off the credit card and leave the account open to keep the positive points for history, longevity and total available credit.
When any of these scenarios ring true for you, you may be closer to discovering why there's been a recent decline to your credit scores. Continue to monitor your habits and know that the little things add up and can adversely affect your credit scores.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Experian.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.