Seeing a 40-point drop in your credit score might seem dramatic, and you have every reason to want to know why. Rather than get frustrated, it’s better to take action — get a copy of your latest credit report and investigate.
Maybe you’ve maxed out your credit cards, missed payments repeatedly, or had errors on your report. Figuring out how to improve your credit can have a lasting impact on your credit score.
Another solution is MoneyLion’s Credit Builder Plus membership that helps those with poor credit work on building their scores back up.
Top Reasons Why Your Credit Score Dropped
Credit reports won’t tell you exactly why your credit score dropped, but the information offers clues. Here are some of the most common reasons for credit scores to go down.
You A Missed Payment
Missing a single payment for at least 30 days could decrease your score, sometimes by as much as 100 points. Higher credit scores usually see a larger drop, and if you miss payments for 90 days your score could drop by 133 points. Missed payments will stay on your credit report for up to seven years.
Adding New Credit
Applying for new credit may increase or decrease your credit score depending on several factors.
Hard inquiries that appear when you apply for new credit could temporarily ding your credit score, and they stay on the report for up to two years.
On the other hand, new credit may improve your credit mix and offset some impact from hard inquiries. Higher credit limits may also improve credit utilization (the amount of credit used divided by total credit), which would positively impact your credit score.
While adding new credit is not always bad for your credit score, don’t open too many accounts at once and keep credit utilization for all accounts below 30%.
NPSL Credit Card
No preset spending limit credit cards have no predetermined spending limits. Instead, the spending limit depends on the cardholder’s spending pattern, payment history, income, number of credit cards, among other factors.
NPSL credit card balances affect your credit score based on how the card issuer reports your credit limit. If the issuer does not report a credit limit, the card will be ignored when calculating your credit score. However, if they report the limit as your highest balance and it looks like you have high credit utilization, it could harm your credit score.
Balance Too High
Credit utilization, which is the ratio of your total debt to your credit limit, makes up 30% of your FICO score.
Ideally, credit utilization should be 30% or less. If your utilization rate is over this limit, pay down the bill by doing side jobs, ask for a credit limit increase or increase your credit types to improve your score.
You should generally try to avoid closing accounts. Closing a credit card decreases your average credit history length and increases your credit utilization. These two factors account for 15% of your credit score.
When it’s necessary to close an account, you can try to offset the negative impact on your credit score. Pay down balances on other cards, open low interest credit lines you can pay back on time, or request credit limit increases to keep the utilization low.
Paid Off Loans
It may seem counterintuitive, but paying off some loans could knock a few points off your credit score. This usually happens when it reduces the credit mix —for instance, you paid off your only installment loan and now you have fewer types of credit. However, this should not prevent you from paying off your balance when you can. You also shouldn’t apply for new credit you can’t afford.
Credit mix only makes up 10% of your credit score, but it still counts. The ideal credit mix blends revolving credit (debt with no end date and varying payments such as credit card debt and HELOC) and installment loans (set payments due over a specific time such as a mortgage, personal loans, and student loans).
Credit Limit Lowered
Credit card issuers may lower your credit limit when you miss a payment, have high utilization, or stop using your credit card. Issuers cannot charge over the limit fees or penalties until after 45 days from when you are notified of the limit decrease that the limit decreased. However, it can hurt your credit score since it lowers your credit limit, increasing your utilization rate.
If this happens to you, try to pay down the balances, make on-time payments, and request an increase in credit limit.
Derogatory marks affect 35% of your credit score and may include late payments, account charge-offs, bankruptcy, foreclosure, liens, and judgments. Most of these items could stay on the credit report for seven years. Bankruptcy could stay up to 10 years depending on the type of bankruptcy while unpaid liens could remain on your credit report indefinitely.
If you are struggling with credit card debt, consolidating your debt could help you reduce payment amounts and lower the overall tab.
Victim of Identity Theft
Credit card fraud, the most common type of identity theft, affects roughly 1 out of 3 Americans.
To detect unauthorized transactions in your account, develop the habit of checking your credit card transactions and credit report weekly (if not daily). Errors in credit reports could be actual mistakes you could dispute, but they could also indicate you’re a victim of identity theft. If that’s the case, lock your credit and report the incident to IdentityTheft.gov.
You can manually check your credit reports or take advantage of credit monitoring services. For instance, MoneyLion’s Credit Builder Plus membership includes 24/7 credit monitoring tools. Roarmoney accounts offer fraud protection on purchases.
Recovering Your Credit
By sticking to a plan, you can improve your credit score in as little as six months.
To score additional points, take advantage of Credit Builder Plus membership. Membership includes access to Credit Builder Loan, a 12-month loan of up to $1,000 to help you build your credit. This loan product is designed to help you improve your credit score by reporting your positive payment history to all three credit bureaus. You’ll also benefit from a better credit mix.
Building your credit isn’t the only perk. Membership also entitles you to access to credit monitoring tools, a financial heartbeat tool, Instacash advances, loyalty program rewards, and other perks.
Building Good Credit Requires Developing Better Habits
Credit scores determine the loans you can get, the rates you pay, the places you can rent, the price of insurance premiums and more. Addressing issues that drag your credit score down takes more than just a high income.
Missing important payments due right before payday can be costly. Try RoarMoney, where you can sync direct deposits to get your paycheck up to two days early. You’ll also benefit from no balance minimums, access to Allpoint ATMs, cashback rewards, and more, all for $1/month.
Developing good payment habits helps you improve your credit score and eventually meet your financial goals.