Common Reasons Your Credit Score Might Drop, and How to Avoid Them

Blog posted On August 25, 2021

When you first start building credit, your payments are likely relatively simple – gas, food, rent etc. But the older you get, the more the bills pile up. Soon, you’re paying for medical expenses, trips, home repairs, clothes, and more purchases than you remember. Still, you pay your bills at the end of the month and check your credit score every so often. Normally it might hover in the same range, but a common shock for credit borrowers is when your score drops unexpectedly. Because your credit score affects your ability to qualify for other financial products, seeing a sudden decline can be disconcerting for most. If you’re wondering what might have gone wrong (and what to be aware of in the future), here are six common causes for a falling credit score.

1. Missed payments

The most common reason for a credit score drop is a missed payment. Even if you think you paid your bills, make sure to double check at the end of the month. Your credit score won’t be affected if you make your payment within 30 days of the due date (though you might have to pay late fees). If your payment is over 30 days overdue, then it can seriously affect your score. According to FICO^®, a person who has never missed a payment could lose over 80 points if they make a payment that’s 30 days overdue. If you can’t afford the whole balance, try to at least make the minimum payment – this can prevent you from the late payment fees and score drop.

2. High credit utilization ratio

Your credit utilization ratio is the difference between how much credit you use and how much credit you have available. A good goal is to keep your credit utilization below 40%. If you’re struggling to keep your credit utilization down, consider opening another account and splitting your expenditures between two cards. This gives you more credit available and should help improve your ratio if you keep your spending at the same level.  

3. New line of credit

If you’ve applied for new line of credit, you might see a temporary drop in your credit score. This is because your credit card company will place an inquiry on your account, which can lower your score by a few points – depending on other factors like payment history. Opening a new account also shortens your length of credit history, which can hurt your score. The longer an account is open, the better effect it will have on your credit score. However, once you consistently make on-time payments with your new account, your score should climb once again.

4. Filing for bankruptcy

When you file for bankruptcy, you’re showing your credit card company that you can’t manage your debts and expenses well. This shows that you’re a risk for the company. Typically, bankruptcy filing can cause credit score drops of around 200 points. After filing for bankruptcy, it can be hard to rebuild your credit score, but after seven years, the bankruptcy will be removed from your report.

5. Looking at a different score

The credit score you see from your bank might not be the same as another provider. If you look at your credit score in a different place than usual, you might see a slight drop just because they’re using different scoring methods.

6. Victim of fraud

If no logical explanation adds up to your credit score hit, then you might be a victim of fraud. If you suspect you might be a victim of fraud, you will want to review your full credit report for any suspicious activity and contact your credit card company right away. If you’re a victim of identity theft, then you will be able to remove the fraudulent activity form your credit report.

Your credit score can impact you any time you apply for a line of credit like a mortgage or personal loan. The higher your credit score, the more likely you are to qualify for lower interest rates. However, we do offer several loan programs that accept less-than-perfect credit scores. To explore all of your mortgage options, contact us today. 

Sources: Money