If you’ve recently pulled a copy of your credit report and noticed a drop in your credit score, you may wonder what caused that drop. There are certain credit behaviors in which you may have engaged that could have put negative information on your credit report, translating to a lower credit score.
Because lenders use your three-digit credit score to assess your risk as a borrower, a lower credit score could mean that you’ll be viewed less favorably and charged more in interest when you borrow money.
Your information is evaluated by the credit reporting agencies (CRAs), which assign you a credit score based on their scoring model. Your scores will vary between the CRAs, and your score is updated each time there is a request for a score. New information received also impacts the model.
As you review your credit score and work to improve your creditworthiness, consider the following five reasons your credit score may drop:
1. You missed a payment.
Late payments—even just one—could ding your credit score.
Payment history has the strongest impact on your credit score (it accounts for 35 percent of your Equifax credit score, for example), so missing a payment on a credit card, mortgage, or other loan could lower your score.
How much a missed payment will lower your credit score can depend on multiple factors, including how severe it is, how recent it is, and how frequently you pay late.
In general, the longer a bill goes unpaid, the more your score could drop. A recent late payment can also reflect more negatively on your credit score than an older one. Plus, if you have a high credit score to begin with, one late payment could actually have a more significant negative impact than if your score were lower.
If you fall behind on your bills and a late payment is added to your credit report, it could remain there for up to seven years.
2. One of your accounts has been sent to collections.
If you continue to miss payments on one of your credit accounts, it may be sent to collections, which could negatively impact your credit score.
Similar to a late payment, the higher your credit score, the more points it could drop as a result of a collection. The amount you owe on the collection could also impact how significant of a drop your credit score experiences.
Typically, an account in collections will remain on your credit report for up to seven years plus 180 days from the date the account first became past due. The countdown to the account falling off your credit report begins 180 days after the start of the delinquency that led to the collection.
3. You charged too much on your credit card.
Your credit score takes into account your debt-to-credit ratio, also known as your credit utilization rate, which tells lenders how much of your available credit you are using.
In general, a lower debt-to-credit ratio reflects more positively on your credit score. To look attractive to lenders, experts agree that you should strive to keep your credit utilization rate at 30 percent or less, which means you shouldn’t use more than 30 percent of your available credit.
If you rack up a high balance on one—or multiple—credit cards, you could raise this ratio and subsequently lower your credit score. This could be relatively easy to do on a card with a low credit limit, such as a retail credit card.
4. You opened too many new accounts at once.
While it’s good to expand your credit portfolio, opening multiple accounts within a short timeframe could actually harm your credit score.
The length of your credit history, or the amount of time your credit accounts have been established, represents 5 percent to 7 percent of your credit score. Every time you open a new account, it shortens your average account age.
5. You have inaccurate or outdated information on your credit report.
You could find an error on your credit report if one of your lenders incorrectly reports your account information, or it could be a sign that you’ve become a victim of identity theft or fraud.
Either way, an error on your credit report could cause your credit score to drop and make it more difficult for you to borrow money at the most competitive terms and rates.
To ensure the information on your credit report is accurate and up to date, you should regularly pull a copy of your report and carefully review it. You can order one free credit report from each of the three national credit reporting agencies every year through AnnualCreditReport.com.
Comb through your report to make sure the payment history, balance amount, and account age are correct for each of your credit lines, and confirm that your personal information—such as your name and address—is accurate. You should also ensure that all negative credit information has fallen off of your credit report after the appropriate amount of time has elapsed.
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