what causes your credit score to go down

Some factors cause your credit score to drop

Avoid these issues in order to get a good credit score.

To maintain good financial standing, you need to monitor your credit score. A drop in your credit score isn’t the end of the world. However, it is pertinent to understand what could trigger the change.

With this knowledge, you can effectively work on improving your credit score.

Lean in. 

1. Bankruptcy or foreclosure

If you find your debts unbearable as a borrower, the law offers bankruptcy to get some respite. 

In the event of significant default on a loan, the lender can take ownership and sell the mortgaged property to recover the amount owed. This is the legal process of foreclosure. Typically, foreclosures occur in the event of 120 days of delinquency. This means you’ve missed your payments for at least four consecutive months.

Since bankruptcy and foreclosure consist of missed payments, their presence on your credit report causes your credit score to drop. In addition to damaging your credit score, they can also ruin your chances of getting loans later.

2. High credit utilization rate

Do you know the amount of available credit you use impacts your credit score?

According to the Consumer’s Financial Protection Bureau, consumers should maintain their credit utilization ratio below 30% in order to keep their credit scores afloat. So, if you have a credit limit of $20,000, and you typically spend $2,000 of it (10%), your credit score won’t be negatively impacted.

However, if you make an expensive purchase and spend $12,000 (60% of your credit limit), your credit score will sink.

3. Opening or applying for multiple lines of credit

If you open or apply for multiple lines of credit within a short period of time, it will cause your credit score to drop. This is because it signals you as a notable risk to potential lenders.

Also, it will instigate hard credit inquiries. Multiple hard credit inquiries on your credit report within a brief period of time can cause your credit scores to drop as well.

4. Credit reporting errors

We can’t overemphasize the fact that credit reporting errors are a reality. Because of the pandemic, the Consumer Financial Protection Bureau saw a record number of credit reporting complaints in 2020. That’s why it’s necessary for you to scrutinize your credit reports often.

The mistakes could be in the form of late or missed payments, strange transactions from another consumer’s report, accounts opened by cybercriminals in your name, etc. Once you identify any error on your credit report, kickstart the disputing process with the reporting bureaus and the lender.

5. Identity theft

Identity theft is a known destroyer of one’s financial standing. Identity theft will wreak havoc on your credit report and cause your credit score to plunge.

This crime occurs in various ways, such as identity thieves making expensive purchases using your cards or opening new accounts in your name. Of course, the thieves never pay back the outstanding debts left in your name, and they count as missed payments for you.

One of the problems with identity theft is victims are usually unaware of it until things start getting out of hand. However, if you discover you’ve been a victim, you can take steps to protect yourself in the future.

6. Reduced credit limit

Strongly tied to the credit utilization rate, a reduced credit limit causes your credit score to fall. Assuming that you had a $20,000 credit limit, and you typically spent $5,000 of it, that would be 25%. However, if your credit limit was reduced to $10,000, using $5,000 of it would mean using 50%.

Therefore, such a high credit utilization ratio does your credit score no good.

7. Late or missed payments

Your payment history is a crucial factor when calculating your credit score. In fact, it is the most important factor in calculating your credit score, according to FICO.

It’s worth mentioning that delayed payments of just a few days do no harm to your credit score. However, if you let it linger for more than 30 or 90 days, they typically show up as delinquent on your credit report.

8. Derogatory items on your credit report

Derogatory items or marks refer to statements on your credit report that indicate that you defaulted on your loan repayments. Such defaults could be in the form of bankruptcy, foreclosure, late payments, etc.

Some of these derogatory remarks could last almost a decade on your credit report.

9. Closed credit cards

Closing one of your credit cards could be detrimental to your credit score. This is due to at least two reasons.

Primarily, closing a credit card diminishes your available credit. You are duty-bound to equally reduce your expenses from the credit to ensure that you don’t have a high credit utilization ratio. Otherwise, your credit score will dip.

Also, closing a credit card shortens your credit history. If the account is really old, you need to have second thoughts before closing it because old accounts seem to matter more when calculating account age.

10. Loan payments

Having a well-varied credit mix of loans, mortgages, credit cards, and different types of credit products is good for your credit score. At least, it’s a factor, according to FICO. Therefore, repaying a loan takes one kind of credit out of the equation.

It could cause a drop in the credit score. However, this drop is only short-lived because if you keep doing the right things, your credit score will find its way back up. So, we are all in support of you repaying your loans, but we just thought to give you the heads up.

So, with these tips, work on your financial habits and watch your credit score soar. If you happen to need some extra help in any way, we are here to help.

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