Monday, June 5, 2023

Why Credit Score Went Down

Have I Taken On New Credit

Why Your CREDIT SCORE Went Down!

Have you taken out a mortgage or applied for a new credit card?

When you apply for new credit the lender makes a hard inquiry. All this means is that the lender will complete a credit check before deciding whether to lend you money. The hard inquiry will be noted on your credit report, which will make your credit score slightly lower for a short time.

This is because taking on new credit will make your average credit age shorter. The shorter the average age of your credit score, the lower your credit score. This credit check will stay on your credit report for two years. Hard inquiries are somewhat inevitable as you go through life and apply for mortgages, loans and so on.

“If you have not paid back your loans in the agreed way, the credit issuer may place a derogatory mark on your credit report. The derogatory mark is placed on credit reports where there is a tax lien, a bankruptcy, or a foreclosure.”

Help & Advice

But, applying for many new lines of credit can cause a significant credit score drop, and lenders may worry whether you are in a position to take on new debt.

To avoid running up unnecessary inquiries, use eligibility checking tools to find out how likely it is that the bank will accept your application.

Your Credit Report Says You Missed A Payment Even Though You Paid On Time

Dispute any mistakenly reported late payments so that they dont unfairly affect your credit score.

Since payment history is the most important factor in your credit score, an incorrectly reported missed payment could severely damage your credit, especially if you are starting with very good credit. The higher your score to begin with, the more you stand to lose from a credit mistake.

This type of situation is another example that demonstrates why its so crucial to regularly check your credit report. If you always made all of your payments on time, you might assume that you must have a spotless credit record, only to find out at an inconvenient time that a creditor has been incorrectly reporting that you missed a payment.

Keep an eye out for errors like this on your credit report so that you can dispute them right away.

Something Was Recorded On Your Credit Report

Think back on your payment history have you missed a credit card payment in the last few months? Were there any bills that you may have missed in previous months?

Missed payments are typically not reported to the credit bureaus until theyre at least 30 days late, so your score wont be impacted until after that time. Your score will be hurt by a payment thats more than 30 days late, but a delinquency, referring to a payment that is over 30 days late, can devastate your score.

Derogatory marks such as tax liens, charge-offs, collections, foreclosures or bankruptcies have drastic impacts on your credit too, and it may take weeks or months for them to show up on your report. If youve experienced any of these, it may take time for your score to change.

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Some Lenders Use Industry

In addition, some lenders may use a credit scoring model that’s specific to a certain industry, which may not generate the same score you receive from one of the three nationwide CRAs. For instance, if you’re buying a car, the lender may look more closely at your payment history regarding auto loans.

While credit score fluctuation is normal, it’s important to ensure the changes don’t result from inaccurate or incomplete information on your credit reports. Therefore, it’s a good idea to regularly review your credit reports from the nationwide CRAs.

Types Of Accounts That Impact Credit Scores

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Typically, credit files contain information about two types of debt: installment loans and revolving credit. Because revolving and installment accounts keep a record of your debt and payment history, they are important for calculating your credit scores.

  • Installment credit usually comprises loans where you borrow a fixed amount and agree to make a monthly payment toward the overall balance until the loan is paid off. Student loans, personal loans, and mortgages are examples of installment accounts.
  • Revolving credit is typically associated with credit cards but can also include some types of home equity loans. With revolving credit accounts, you have a credit limit and make at least minimum monthly payments according to how much credit you use. Revolving credit can fluctuate and doesn’t typically have a fixed term.

Also Check: Do Closed Accounts Affect Your Credit Score

Your Credit Card Issuer Reduced Your Credit Limit

Sometimes, credit card issuers lower the of their cardholders, even for those who have consistently managed their accounts responsibly.

Unfortunately, they are usually allowed to do this without asking for your permission or letting you know in advance, so it may come as a nasty surprise when you swipe your credit card and get declined, or when your credit score takes a dive because your credit utilization is suddenly much higher.

There are a few reasons why your bank may reduce your credit limit, such as the following:

  • Your balances have been increasing, which indicates that you are taking on more debt and might be at a greater risk of defaulting.
  • You missed a payment and your account becomes delinquent.
  • Your account was inactive because you did not use your credit card enough.
  • The economy is down and lenders want to minimize their risk exposure levels.

Regardless of why your credit limit took a hit, the result is the same: with less available credit, your increases, which is bad for your score.

If your credit card issuer slashed your credit limit, check out How to Increase Your Credit Limit for some useful tips, and dont be afraid to give your bank a call to ask them to reconsider.

You Applied For A New Credit Card

Card issuers pull your credit report when you apply for a new credit card because they want to see how much of a risk you pose before lending you a line of credit. This credit check is called a hard inquiry, or “hard pull,” and temporarily lowers your credit score a few points. Hard inquiries remain on your credit report for two years, but FICO only considers inquiries from the last 12 months when calculating your credit score.

But hard inquiries on your credit report aren’t necessarily bad when they happen in moderation. After all, applying for credit cards is a great first step in building credit. When you use credit cards correctly by charging purchases and paying them off in full by the due date they can help increase your credit score. If you’re looking to build credit, consider the Petal® 2 “Cash Back, No Fees” Visa® Credit Card, which offers cash back, or the Capital One Platinum Credit Card that is designed for average credit applicants.

To reduce the number of unnecessary hard pulls on your credit report, check if you qualify for a new card by using issuers’ preapproval or prequalification offers. These won’t guarantee that you’ll be approved for the specific credit card, but they’ll give you a good idea.

When it comes to actually applying for new credit products, be sure to spread out your credit card applications over time. Only apply for a new credit card every three months, and maybe wait even longer between applications if you have a lower credit score.

Also Check: Credit Score For Home Equity Loan

You Closed A Credit Card

Think twice before closing a credit card you don’t use. Closing a credit card account will not only increase your utilization ratio, it may also reduce the length of your credit historyboth of which can impact your credit score.

When you cancel a credit card account, that credit limit is removed from your overall utilization ratio, which has the potential to lower your scores. Closing a credit card account you have had for some time can also shorten your average credit age, and that will factor into your credit score.

The length of your credit history counts for 15% of your FICO® Score, so a longer history is better for your scores. Keep in mind, however, that if your account is closed in good standing , it could remain on your credit report for up to 10 years.

Unless the credit card has a high annual fee that you cannot afford or it tempts you to spend more than you should, it doesn’t hurt to keep the account open to maintain your credit limit and length of credit history.

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Your Credit Utilization Has Changed

Your credit utilization ratio is the amount you owe on your credit card relative to your credit limit. It influences your credit score, so a change in either of the two can cause your score to adjust.

Have you charged more on your credit card lately? If so, your credit utilization may have increased, which can negatively impact your score. Typically, having less than a 30% credit utilization can keep your credit in top shape.

Check to see if your credit card company has increased or decreased your total limit. Often credit card companies will tell you if youre eligible for a change in credit limit, but they could alter it without you knowing. If your spending habits remained the same, an increase in your credit limit would decrease your credit utilization ratio, which can positively impact your score. A decrease in your credit limit would increase your utilization ratio thus, your score could go down.

You Applied For New Credit

Any application for new credit, be it a credit card, a line of credit, or a loan, results in a hard inquiry on your credit file. Each hard inquiry can cause your score to drop a few points, although it’s nothing big.

How to fix it — There’s no work needed on your part this time, as hard inquiries only affect your credit for a year. One hard inquiry won’t cause that much of a dip in your score.

You will, however, want to avoid any more credit applications so that your score can recover.

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Why Is My Credit Score Low Even Though I Pay My Bills On Time

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If your credit score is lower than you thought it would be, you probably want to know why and what it will take to fix it.

It can be especially perplexing if you thought you always paid on time and expected to have a good credit score. Here are five reasons you may be in a lower credit score range than expected.

You Didnt Use Your Credit Card For A Long Time

MyFico Credit Score Breakdown Chart

Your credit card issuer might have closed your account if it had been inactive for a long time.

If you dont use a credit card for a long period of time, its possible that your credit card issuer may decide to close your account due to the lack of activity.

As we discussed above, a closed credit card is bad news for your credit since the loss of available credit hurts your credit utilization and it may also damage your mix of credit.

According to The Balance, the credit card company is not required to give you advance notice if they plan to close your account, so its best to take proactive measures to prevent this from happening.

To avoid having your card closed due to inactivity, make sure you use it to make a purchase at least once every few months. An easy way to do this is to use the credit card to pay for a subscription service that renews each month. Then, set up automatic bill payments on your credit card and the whole process will be automated.

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Someone Else Used Your Credit Card Account

Whether your 10-year-old pulled it out of a desk drawer and set up an online game account or your credit card was cloned and used by a stranger, someone ran up a big balance and you had no idea.

The fix: Call your credit card issuer. In the case of a stranger using your card, youll get a new card and wont be responsible for charges. Someone in your household using the card without your knowledge is more of a family issue. Consider setting up alerts to notify you when the card is used.

Hard Inquiry Or Soft Inquiry

A hard inquiry is when you applied for some form of credit in the form of revolving, installment, or open accounts. Lenders will review your credit when making their decisions to qualify you for approval. This type of credit pull will show up on your report and impacts your overall credit score. An example of this is a mortgage or auto loan.

In contrast, a soft inquiry happens when you review your credit score or a lender, like a credit card company, checks your credit for a pre approval offer. These types of inquiries do not impact your credit score.

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Mistake On Your Credit Reports

So far weve assumed that your credit scores dropped because of accurate information on your credit reports. But what if thats not the case?

Lenders can make mistakes too. Thats why its important to check your credit reports to keep an eye out for errors. The CFPB says that credit report inaccuracies are one of the most common issues it deals with each day.

If you find a mistake on your credit reports, you have the right to dispute it with the credit bureaus and with the reporting lender. Companies are required to investigate the dispute free of charge and promptly correct errors that are confirmed.

Your Average Of Accounts Decreased Because Of A New Account

Why did my credit score go down? | Rebucketing

As weve written about many times in the articles in our Knowledge Center, the age of a tradeline is extremely important, as is your overall credit age. This is because credit age is linked to payment history, which is vitally important to your credit health.

Payment history makes up 35% of your credit score and credit age contributes 15% to your score. When you add the two together, you get 50%, which means that half of your credit score is controlled by these two connected factors.

Within the category, your average age of accounts is thought to be one of the most important variables. The more age your tradelines have, the more they can benefit your credit. Therefore, anytime you decrease your average age of accounts, you run the risk of your score decreasing as a result.

So if you recently opened a new primary tradeline or if you were added as an authorized user to an account that lacks age, the decrease in your average age of accounts might be whats behind your credit score troubles.

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A Spike In How Much Credit You Use

Your total available credit limit is the amount youâre able to borrow across your credit accounts. .

With your credit limit, itâs all about balance. Using too little credit could harm your score, as youâre not able to prove to lenders how you manage credit. However, using too much of your credit limit could suggest to lenders that you’d struggle to repay any new debt. This can cause your credit score to drop.

Itâs recommended that you try to keep your credit usage below 30% of your total credit limit.

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Why Does My Credit Score Fluctuate

Credit scores are based on a variety of factors that can cause your score to fluctuate. Its important to distinguish which credit behaviors are high-impact offenders, and which ones are low-impact and might not have a significant effect on your credit score.

Knowing how your credit is scored, and what has caused your credit score to fluctuate can help you understand how to repair it and help you adopt better credit management practices.

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You Finished Paying Off An Installment Loan

Making the final payment on your auto loan, student loans, or mortgage is an exciting accomplishment. Yet, when you finish paying off an installment loan, your credit score may decrease instead of increase.

Even though you now have less debt, which sounds like it would help your credit score, this may not outweigh the negative impact on your mix of credit. The paid-off installment loan will now report as a closed account, which can be harmful to your credit if all you have left is a few revolving accounts.

@LizOfficer shared a real-life example of this on Twitter.

This Twitter user commented that paying off her loan made her credit score go down since it affected her mix of credit.

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