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Your credit scores aren’t static numbers. Like the digits on a scale, a credit score can rise or fall. In the case of a credit score, this movement is based on the information contained in one of your credit reports from Equifax, TransUnion, or Experian.
Yet unlike the numbers on your bathroom scale, when you discover that your credit scores dropped, it’s usually cause for alarm.
First, it’s worth pointing out that you don’t technically “lose” points from a credit score. Rather, when a new negative action on your credit report increases your level of credit risk, you earn fewer points. Either way, the result is still a lower overall credit score.
Below is a list of common actions that might net you a lower credit score.
One of the fastest ways to sink your credit scores is to fall more than 30 days behind on a credit obligation. FICO bases 35% of your credit score on your payment history, so late payments can have a major impact.
Setting up automatic payments for loans and credit cards is a great way to help make sure your monthly payments stay on time. (Though you should always double check to make sure payments go through as scheduled.)
Credit card debt can have a big influence over your credit scores. This is because credit scoring models are concerned with the relationship between your credit card limits and balances, also known as your debt-to-limit ratio or credit utilization. When your debt-to-limit ratio increases on credit cards, your credit scores often decline.
It’s best to pay your balances off in full every month. This will help you avoid paying expensive interest fees. However, if you wait until the due date to make your credit card payment, you might still have high utilization for the coming month. If you’re worried about this possibility, you can make a payment before the statement closing date on your account. Doing so can help make sure the balance reported to the major credit bureaus for the upcoming month remains low as well.
It’s true that applying for new credit has the potential to hurt your credit scores. However, the impact of hard credit inquiries is often exaggerated. The effect of an occasional credit inquiry on your credit scores is often minor (and sometimes nonexistent).
That being said, adding a new account to your credit reports might be a bit more problematic — at least in the short term. A new account can lower your average age of credit. Since 15% of your FICO Scores are based on factors related to your length of credit history, a new account has the potential to lower your credit scores.
Credit scoring models consider a collection account to be a major derogatory item on a credit report. Depending upon the rest of your report, a collection account could significantly increase your level of credit risk. If your credit scores suddenly decrease without warning, it’s wise to check if any collection accounts have been added without your knowledge.
Sometimes a credit score drop happens not because you did anything wrong, but because a mistake was made. Did a lender report a late payment when you have proof that you paid on time? Did a credit bureau accidentally add the account of someone with a similar name to your credit report?
The Fair Credit Reporting Act (FCRA) gives you the right to dispute any inaccurate information that shows up on your credit reports. If you need to dispute credit report errors, this helpful guide can show you how.
Credit scoring models by FICO and VantageScore are built with similar goals in mind — also called their stated design objectives. They predict the likelihood that you’ll pay any of your credit obligations 90 days late (or worse) in the next 24 months.
Sometimes a credit score can go down for seemingly no reason at all. However, there’s always an explanation behind a credit score decrease — even if it’s hard to find or understand.
Credit scores used by lenders in the United States have to comply with a law known as the Equal Credit Opportunity Act (ECOA). Per the ECOA, credit scoring systems must be “empirically derived” plus “demonstrably and statistically sound.” In plain terms, this means that credit scores have to be built using accepted scientific methods and they have to work.
If something causes one of your credit scores to drop, legally there has to be a reason (provided it’s a score a lender uses). Remember, a lower credit score means your credit report now represents a higher risk to lenders. In other words, the odds of you becoming 90 days or more late on a credit obligation in the next 24 months have increased.
Below is a list of some unusual reasons your credit score might have decreased.
It’s unfortunate, but the truth is we live in a world where identity theft abounds. Millions of people fall victim to identity-impersonation crimes every year.
If someone steals your personal information and applies for fraudulent accounts in your name, credit score damage will probably be part of the aftermath. Thankfully, the FCRA is on your side again.
You can visit IdentityTheft.gov to fill out an official Identity Theft Report. From there, you can submit the report to the credit bureaus and any creditors involved in the fraud. Legally, the credit bureaus will have to block any fraudulent accounts from your credit reports within four business days.
The FCRA requires old, negative information to be removed from your credit reports — typically after 7-10 years. However, the credit bureaus also have a policy of removing most old, positive accounts from your credit reports eventually as well.
If a positive account (one with no negative history) is closed, it will generally stay on your credit reports for 10 years. After that, the credit bureaus remove it. Unfortunately when the bureaus remove such an account, your credit scores might drop.
In most cases, a credit card issuer has the right to decrease your credit limit as it sees fit. Just as a credit card company can give you a credit limit increase without warning, it can lower your limit as well. Unfortunately, not only can a lower credit card limit be inconvenient, it might also hurt your credit scores.
A lower credit limit can increase your credit utilization — both on an individual account and on all of your credit cards as a whole. If your credit utilization rate increases, you’ll need to pay down your credit card balances (perhaps on multiple cards) to try to undo any credit score decrease you experience.
Another way to accidentally trigger a credit utilization increase is by closing a credit card account. As mentioned, any increase in credit utilization could spell trouble for your credit scores.
It’s worth pointing out that closing a credit card won’t cause you to “lose credit” for the age of the account. That’s a myth. FICO and VantageScore both will continue to factor the closed account into your average age of account calculations.
Just like your savings and investment accounts, remember that your credit is an asset. A good credit rating can help you save money and give you the opportunity to tap into lucrative rewards. Both can have a genuine impact on your bottom line.
It’s wise to make a habit of monitoring your three credit reports and scores frequently. When you keep an eye on your credit reports, you’ll be the first to know when something goes wrong. Credit monitoring won’t prevent a problem from happening. However, it will put you in a position to react quickly when and if you need to take action.
Have any other questions about credit or credit cards? Learn more about all kinds of credit topics in the Insider Academy.
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