The 10 Most Common Reasons for a Credit Score Drop

Credit Card

Is there anything good about finding our your credit score has taken a tumble? Credit scores will fluctuate a few points up and down every month, but drops over 25 points or more are worth paying attention to. The problem is many times we don’t know what happened to cause such a big drop. To help you understand, here are the 10 most common reasons for a credit score drop.

1. The amount of credit you have used has increased significantly

Some articles will tell you that you have used more credit, but it is the amount that matters. Running up your credit by $100 is not likely to change your credit score. But $1000 is usually a number that will move your credit score lower. According to the credit reporting agency Experian, the average amount of credit card debt is $6,375. That extra $1000 will increase your debt by almost 16 percent.

2. You missed more than one payment

This is one of those overblown reasons, but something you need to pay close attention to. The reason is that most credit card companies will allow you to make a late payment since they don’t actually report a missing payment to the credit bureaus for 59 days. Calling your credit card company and explaining your situation can buy you the time you need to catch up on your bills.

3. Your report was erroneously marked with a negative event

Credit reporting agencies make errors on individual credit reports every day. One of the most common reasons is two people having similar names (John Smith), so if you notice a drop in your score for no apparent reason, check your credit report and see if there are any new items that may have been incorrectly reported.

4. You closed a credit account

Closing an old credit card account is usually a bad idea because it changes the percentage of your total debt. For example, if you have a total credit limit of $5000 for 4 credit cards and you have $2000 available, your percentage of credit used is 60%. If you close a $1000 account, you will have $4000 across 3 cards, but instead of 60% used you will have increased that usage to 75%.

5. You paid off your student or car loan

If you thought paying off your student loan or car loan was a good thing, think again. This is especially true if you have no other types of credit other than a student or car loan. The FICO score takes a number of factors into consideration, and if you only have one or two types of loans, paying one off can send the wrong signal to lenders – and your credit score.

6. An application for a new credit

For most people this is a no=brainer. What has to be pointed out here is it is the application that is the point, not actually getting credit. In fact, if you apply for a new card and get, let’s say, a new $1000 line of credit your credit score is likely to go up. But if submit one application after another without being accepted, that is sure to drop your score fast.

7. Changes in the FICO Formula

The only way you will get this kind of information is by staying abreast of financial news. Even the smallest changes may not affect everyone, but what if you are that person in the small group that it does affect? You check your credit report and everything appears normal. This is one of those events that most people don’t look for, so if your credit score drops significantly and everything appears normal, check for this.

8. The FICO Scorecard

Most people aren’t aware of this reality, but the easiest way to understand it is to ask yourself whether you and Bill Gates are both at the same level of creditworthiness. The FICO scorecard groups people based on a number of factors, and you can be moved from one group to another without knowing about it. For example, if you have gone through bankruptcy and are at the end of the 7 year period, you are likely to be moved out of the “Bankruptcy” group because that makes sense. But you can also be moved out of your current group down, so this is something you need to be aware of.

9. Bankruptcy

More and more people are filing for bankruptcy, and this is an action that will definitely send your credit score down several hundred points. It is unlikely you will hit the absolutely lowest score of 300, but it usually takes a minimum of 3 months or more to start slowly moving back up. Though many people pay little or no attention to their credit score after filing for a bankruptcy, keeping track of it is a good idea to make sure there are no mistakes that have been made to make the situation worse.

10. Changing addresses too often

If you have applied for a credit card, you know that one of the areas you have to complete is to provide a former address if you haven’t been living at your current residence for more than 2 years. Moving around is often a sign of financial instability, making you a greater risk to potential lenders.

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