(ThyBlackMan.com) You check on your credit score only to find out it’s dropped. What gives? Before reacting, try to understand what may have happened to make it decline. Here are just six out of many reasons why your credit score may have dropped.
#1: You’re Late on a Payment
Life gets busy; the envelope with your latest credit card statement sits on your hallway table unopened for a few weeks—or a few months. Or, you miss an email from your loan provider about paying your latest installment. Or maybe you’re simply struggling to pay your rent or mortgage this month, meaning you have to prioritize in terms of urgency.
Whatever your reasoning for missing a payment, be aware it will lower your credit score after a certain amount of time. The best fix is always paying it as soon as possible. Devise a system to help you stay on top of payments so you can avoid missteps like this in the future. You may even be able to reach out to your creditor and explain the situation. If you have a good track record, they may consider letting you off the hook this once.
#2: You Use a High Percentage of Available Credit
One major factor in calculating your credit score is credit utilization ratio: The percentage of available credit you use, or your current balance divided by your total credit limit.
Many financial experts believe keeping your utilization under 30 percent is the best way to maintain or raise your score. As ValuePenguin notes, “Your credit score may drop gradually as your credit utilization increases from 0 percent to 100 percent.”
If you’re inching closer to maxing out your credit cards, you may notice a drop in your credit score. Stay aware of how much you can technically put on credit versus the amount you actually are.
#3: You’re Going Through Debt Settlement
Some consumers decide to pursue a process like debt settlement to deal with heavy debt, like $10,000 or more. The upside is that programs like Freedom Debt Relief could help consumers settle their debts for less by negotiating down the amount owed with creditors. The downside is that, in the process of saving up a certain sum to kick off negotiations, consumers often fall behind on making payments—something that adversely affects credit score.
The trick here is weighing long-term benefits versus short term costs. If a strategy like settlement will help you get out from underneath a mountain of debt, you may very well decide it’s worth taking the temporary hit to your credit score.
#4: You Closed Old Credit Cards
Did you just do some “spring cleaning” on your unused credit cards? Closing unused accounts brings a sense of closure. But it also affects your credit utilization ratio by reducing the total credit available to you. So, your score may drop.
#5: You Applied for More Credit
Applying for credit periodically is perfectly normal. But be aware that each time you do so, creditors will perform a “hard inquiry” on your report. There are exceptions to this rule though; for instance, if you apply for a credit card with SoFi, they conduct a soft credit pull that will not affect your credit score, so pop over here if this is something you require. Furthermore, your score may drop if you apply for multiple new lines of credit in a short period of time, as evidenced by these hard inquiries.
#6: You Just Paid Off Debt
Wait, shouldn’t paying off debt make your credit score go up? While it’s always worth celebrating paying off outstanding debt, consumers may actually see their credit scores drop after the final installment. Why? Because your credit rating factors in how many credit accounts you have. When you lose one, especially a major one, your credit utilization inevitably changes. So, your credit score may dip even for something that’s a net positive for your overall financial outlook, like paying off a loan or debt you’ve had for a while.
The more you understand about the factors affecting your credit score, the more empowered you’ll be to control it.
Staff Writer; Larry Shaw