After weeks of scrimping, saving, budgeting and paying off your debt, you check your credit score and see … a drop? That can’t be possible — right? Few things are quite as frustrating as seeing your credit score fall, especially when you’ve been working to raise it. But it happens to all of us, and you can get right back on track.
It’s possible to bounce back from a lowered score — you just need to know what caused it. We’ll go over a few of the common reasons why you might see your credit score drop and how you can monitor your score fluctuations with MoneyLion.
Why Did My Credit Score Drop?
There are a lot of different factors that go into your credit score calculation. It can be difficult to predict how your score will change on a month-to-month basis because there are many factors that influence it.
Here are a few common reasons why you might see a drop in your credit score, and we’ll go into each of those reasons in more detail below:
- You missed a credit card or loan payment.
- One of your accounts went to collections.
- You made a big purchase with a credit card
- You maxed out your credit card.
- You closed one of your credit cards.
- Your credit card company lowered your credit limit.
- You applied for more credit.
- You declared bankruptcy.
- There’s incorrect information on your credit report.
You Missed a Credit Card or Loan Payment
Few things will lower your score quite as fast as a missed payment. Your payment history is the most important factor in determining your credit score. It makes up between 35% to 40% of your score composition. Missing a single loan or credit card payment can seriously impact your score.
Lenders usually consider a payment to be late if it isn’t paid 30 days after the due date. Make sure you always make at least the minimum payment on all of your loans and cards each month to avoid seeing a drop in your score. Having trouble remembering when all of your accounts are due? Set yourself a reminder on your cell phone’s calendar a few days before your payment due date. This will give you time to make your payment and have it processed before it’s considered to be late.
One of Your Accounts Went to Collections
Late credit card and student loan payments aren’t the only delinquent bills that can lower your credit score. Non-credit accounts (like your phone bill or any rent-to-own agreements) typically don’t hurt your credit score if you’re late on a single payment. However, the company that issues service will hand your bill off to a debt collection agency if your accounts become seriously delinquent.
Collection agencies often report unpaid balances to credit reporting bureaus. This can cause your outstanding balance to end up on your credit report and hurt your score. Keep track of all of your monthly bills and pay them on time to avoid a drop in your score.
You Made a Big Purchase on a Credit Card
High credit utilization can also lower your credit score. Credit utilization refers to the amount of money you put on your credit cards every month. You’re more likely to miss a payment if you put a lot of money on your credit cards each month and your score goes down.
Credit card companies calculate your credit utilization on a rolling basis every pay period. A major purchase, like a new washer and dryer unit or new living room furniture, can sharply raise your credit utilization. Luckily, you can counteract this drop in your score by paying off your purchase in full before the next billing cycle arrives.
You Closed One of Your Credit Cards
It might seem like a natural step to close cards you don’t use if you’ve gone into debt with credit cards in the past. Unfortunately, closing current lines of credit automatically raises your credit utilization. For example, let’s say that you have two credit cards and each one has a $1,000 credit line. Let’s say that you spend $500 a month between both cards. Your total available credit in this scenario is $2,000 and you spend $500 a month. That’s a credit utilization rate of 25%.
Now, let’s say that you close one of your cards and start putting all of your expenses on one card. Even though you’re still spending the same amount of money each month ($500) your credit utilization rate is now 50% because you cut your available credit in half.
Furthermore, having older accounts shows a higher “credit age”, which tells lenders and the credit bureaus that you’ve been borrowing and managing debt for longer, which is something they like to see. In short, it’s typically better to leave current credit lines open when you’re cultivating your credit score. With MoneyLion credit monitoring services, you can see your Credit Age right in the MoneyLion app, so you’ll know where you stand.
Your Credit Card Company Lowered Your Credit Limit
A credit card company might lower your credit limit if you fall behind on your payments. A credit deduction has the same effect as closing one of your cards.
To counteract this decrease in available credit, it’s a good idea to limit the amount of money you put on your credit cards. This will lower your utilization rate. After a few months of on-time payments, your lender may allow you to apply for an increase in credit.
You Applied For More Credit
Creditors put what’s called a “hard inquiry” on your credit when you apply for a mortgage or a new credit card. Hard inquiries show up on your credit report and lower your score. When you need to check your score, do a “soft inquiry” through a credit monitoring service or your credit card’s app, if possible. Soft inquiries don’t lower your score at the same rate as hard inquiries.
Why does checking your credit score lower it? Hard inquiries lower your score because they indicate that you might be applying for more credit. Applying for too many lines of credit at once is a big red flag for lenders. Hard inquiries lower your score to discourage you from applying for too many loans at once. Don’t apply for any other credit if you’re getting ready to apply for a big loan (like a new credit card or a mortgage).
Some loans, like the 5.99% APR loan that’s part of Credit Builder Plus from MoneyLion, don’t require a credit check. That’s a great option, especially when you’re avoiding credit inquiries and building your credit.
You Declared Bankruptcy
You can expect to see a serious drop in your credit score if you declare bankruptcy. Bankruptcy is a legal classification that absolves you of your debt in exchange for taking on a payment or restructuring plan. When lenders see that you have a bankruptcy on your credit report, they will be very hesitant to work with you. You should only file for bankruptcy as an absolute last resort — not as a “get out of debt free” card.
There is some good news if bankruptcy is your only option. Bankruptcies don’t stay on your credit report forever. Credit reporting bureaus must remove bankruptcies from your credit report after seven to 10 years, depending on your chapter filing.
There’s Incorrect Information on Your Credit Report
Have you been doing everything right — yet you’re still seeing a lower credit score? A surprisingly high number of Americans have mistakes on their credit reports that cause a lower score. About one in every five people has at least one mistake on one of his credit reports, according to data from the Federal Trade Commission. If you have an error on your report, your score might be lower than it should be.
The only way to tell if your credit report has a mistake is to read each one of your reports and hunt for errors. You’re entitled to one free pull of each of your credit reports every 12 months under the Fair Credit Reporting Act. You can get your free credit reports by visiting http://annualcreditreport.com. Some of the most common errors you can watch for include:
- Items for someone who has a name similar to yours.
- Payments listed as late or missed that you made on time.
- Not removing old data and items after they’ve expired.
- Accounts listed as “closed by lender” that you closed yourself.
- Loans, credit lines and late payments listed more than once.
- Incorrect spelling of your name or an incorrect Social Security number.
Report any mistakes to the credit reporting bureau that issued the report. If the error is on all three of your credit reports, you need to report it to each bureau individually. By law, the credit reporting bureau must investigate your claim and remove the item if it’s wrong.
Our partner Dovly can help! Dovly’s credit repair solution is simple, transparent, and can make a major impact on your score – 92% of customers experience a 54-point increase in just 6 months.
By automatically disputing the mistakes with all three credit bureaus, monitoring your credit, and updating your score, Dovly takes action to make sure your report is accurate and your score is climbing.
How to Monitor Credit Fluctuations
Now, it’s time to create a plan to fix your credit score. One of the best ways to keep track of your credit is by using a credit monitoring service. Credit monitoring services like the one available from MoneyLion allow you to track your score over time without hurting your numbers. MoneyLion even allows you to see how your score would change if you took certain actions, like paying off a loan or missing a minimum payment.
You should be monitoring your credit if you’re applying for a loan soon or your score is low. Consider getting started with MoneyLion’s credit monitoring service to learn more about your score.
Cracking the Credit Code
A lowered score can be frustrating. However, it’s important to remember that working toward a better credit score is a marathon — not a sprint. Getting back on track and sticking to your plan can help you see your score rise.
Are you ready to take control over your credit? Download the MoneyLion app from the Google Play or Apple App store today to get started.