If your credit score has been going down, you’re not alone.
A recent study by the Federal Reserve showed that credit scores have been dropping for Americans across the board. So why is this happening, and more importantly, what can you do to improve your credit score?
Keep reading to find out!
Credit scores are calculated based on a variety of factors – Payment history 35%, credit utilization 30%, length of credit history 15%, new credit 10%, and the types of credit you have 10%.
With over 60% of your score resulting from your payment history and credit utilization, then actions or factors impacting these two can have a large impact on your credit.
1. Missing Payments
Your payment history is simply a record of whether or not you’ve made your payments on time, and credit utilization is a measure of how much of your available credit you’re using, and these numbers are constantly changing. As a result, your credit score can go up and down at any time.
- If you have been late on any of your bill payments then your credit score will suffer as a result. And the later you are with your payment – 30 days, 60 days, 90 days, or more – then the worse the impact on your score
- If your accounts have been sent to collections for lack of payment, then this can also negatively impact your credit score.
2. Having Too High Balances
If you’ve recently made a large purchase – a new car, for example – and had to finance it with a loan, then your credit score may have taken a hit. This is because your credit utilization has gone up, and lenders view this as an increased risk.
Even if you’re making all of your payments on time, your credit score can still go down if you’re using too much of your available credit.
Credit utilization is calculated by dividing your total credit card balances by your total credit limits, and it should be no more than 20% (ideally under 9% if you want the best scores).
So, if you have a credit limit of $1000 and a balance of $200, your credit utilization would be 20%. If you bought a new microwave for $500 on this card, then your credit utilization would increase to 70% … that’s a big hit to your credit score.
3. Having Financial Difficulties
Bankruptcies, foreclosures, etc can all impact your credit score negatively.
It signals to the reporting agency that you are a financial difficulty or ‘something’ taking place that is resulting in you not being able to pay your debts/bills and thus having a higher probability of not making payments in the future.
4. Closing Your Oldest Accounts
Many people mistake the idea that they should immediately close a credit card after paying it off. The truth is you want to leave your paid-off cards open.
Closing credit cards can lead to a drop in your credit score because it shortens your length of credit history and lowers your credit utilization rate – a double whammy.
Closing your accounts – especially your oldest credit cards – can cause your credit score to go down because you lose the history that shows possibly years and years of good payment history.
5. Having Too Much of One Type of Credit
The credit reporting agencies like to see a mix of different types of credit – installment loans, revolving credit, etc. – so if you’ve changed your mix recently, by paying off an installment loan like a car note, or student loan for example, then it could cause your credit score to go down.
I know, this sucks …big time.
It seems pretty crazy that doing a good thing – like paying off a loan – results in a lower score, but it happens.
The good news is, that it doesn’t last forever and after a few weeks, your score will come back up.
6. Errors On Your Credit Report
Errors on your credit report can range from a wrong address, incorrect balances, debt accounts being listed that don’t actually belong to you, and more.
If you find an error on your credit report, it’s important to dispute it as soon as possible as it could be impacting your score.
Credit reporting agencies are required by law to investigate any disputes that are filed, and if they find that the information is indeed inaccurate, they will remove it from your credit report.
This can cause your credit score to go up immediately.
You can get a copy of your credit report for free at annualcreditreport.com, and if you find an error you can file a dispute by mail, online, or by phone to the bureaus.
7. You apply for credit too often
Every time you apply for a new credit card or loan, the lender will do a “hard pull” on your credit report, which can temporarily lower your credit score by a few points.
So if you’re planning on applying for a mortgage or car loan soon, it’s best to avoid any other credit applications in the meantime.
8. You’re not using your credit AT ALL
If you don’t have any credit history – meaning you’ve never taken out a loan or credit card before – then it’s going to be very difficult to get approved for new credit.
Because lenders have no way of knowing how responsible you are with money, they’re much more likely to approve borrowers who have a track record of making on-time payments.
The same thing happens when you have left your credit cards ‘dormant’.
If it’s been too long since you’ve used your credit, then the reporting agencies might – again – have no idea of how responsible you would be with borrowed money.
Would you trust a person to drive you around if they have a driver’s license, but hasn’t driven a car in over 50 years? Maybe, but maybe not. You just wouldn’t know for sure if they’re still good at driving.
That’s how credit bureaus look at you when you don’t use your credit for years on top of years.
Not to mention that keeping credit cards open have costs for the credit card company.
Administrative fees of keeping your account alive statements to generate, and policy changes to mail out to customers can cause those costs to creep up. As a result, some credit card companies can choose to avoid the costs by closing your account for non-usage thus negatively impacting your credit score.
9. You are reactivating/resurfacing bad events
The time since the last negative event and the frequency of missed payments affect the credit score deduction. Someone who missed several credit card payments five years ago, for example, will be seen as less of a risk than a person who missed one big payment this year.
But when you make a new payment to cover your old collection agency or ‘written-off’ debt, the collection agency may change the date of the debt. As a result, the credit reporting agency sees this as a ‘new bad activity’ – lowering your score again – even if it’s really just a new payment on an old bad payment.
That’s why paying off old collection agency or delinquent debts don’t show up in improved credit scores right away.
10. You’re a victim of identity theft
If your credit report includes information that you didn’t authorize – like collections accounts, late payments, or even a new credit card – it could be a sign that you’re the victim of identity theft.
In this case, you should file a police report and an initial fraud alert with the credit reporting agencies as soon as possible.
You can also get help from the Federal Trade Commission’s website, IdentityTheft.gov.
Identity theft can cause your credit score to go down significantly, so it’s important to take action right away if you think you might be a victim.
Credit Scores Can Move For A Number of Reasons
These are just a few of the reasons why your credit score might go down. If you’re concerned about your credit score, fortunately, there are a few things you can do to improve your credit score. First, make sure you’re always paying your bills on time – this is the single most important factor in determining your credit score. Second, keep your credit utilization low by using only a small portion of your available credit. And finally, avoid opening new credit accounts unless absolutely necessary. By following these simple tips, you can improve your credit score and get back on track to financial success!
If you’d like to learn more about credit scores, credit reports, and how to join the 800+ credit score club, then check out this e-book ‘Credit From Scratch‘
And if you’d like to learn more about improving your credit score, check out this article on improving your credit.
Thanks for reading!