You should always be in the habit of checking your credit score and monitoring it. In fact, most people sign up for credit score alerts that let them know when the score changes either positively or negatively. This is extremely important, as it helps you correct a problem before it gets too out of control.
The algorithm behind credit score calculation is a complex one that is difficult to understand, but you can pinpoint the reason why your credit score goes down. This score is a result of the information on your credit report, and therefore, simple scrutiny of your report tells you exactly what the problem might be.
If you suddenly find that your score has dropped unexpectedly, there might be some changes in your report that necessitated this drop. In this review, we shall tell you some of these entries that could have caused your score to change, and in this way, you can have the next cause of action in a bid to improve the score once again.
Reasons why your credit score went down.
You could have increased your credit utilization.
Your credit utilization is the first reason why your credit score could go down. It is the amount of available credit that you can use at any given time. It’s usually used to calculate your credit score, and it is arrived at by dividing the total amount of credit account balances you have against your total credit limit to find a percentage figure.
Creditors use your credit utilization to have an idea of how responsible you are with your credit. Experts recommend that you should always keep your overall utilization rate at or below 30%.
You may have missed a payment on one of your loans.
Missing a payment or making a late payment on one of your loans, such as a mortgage, credit card, or even student loan, is a big problem that can totally mess up your credit score. Missed or late payments are usually reflected in your credit report, which means that they contribute to your overall score, and in addition, you shall end up paying late payment fees.
Now, the reason why this is important in determining your creditworthiness is that credit scores are used to indicate how good you are at paying back loans. If you have created a record of late and missed payments, then your next creditor is likely to have a problem when approving your application.
You may have a derogatory mark on your credit report.
If you have a derogatory mark on your reports such as bankruptcy, a tax lien, foreclosures, or civil judgments, these will definitely contribute to a drop in your credit score. If you notice any of these on your credit report, you must take care of them immediately, because they represent major delinquencies. They reflect poorly on your ability to take care of your obligations.
You may have closed an old credit account.
Closing a credit account that you have paid up in full can actually cause your credit score to drop. This is hard to believe, but it is completely true. In fact, even when you pay up a credit card bill and you no longer use the card anymore, it is advisable to not close the account just yet.
The reason behind this is that the age of your credit history is one of the factors that are used to calculate your credit report. If you close the old accounts, then you are lowering the age of your current credit, and this lowers the average age of accounts. Basically, the higher the age of accounts, the higher the credit score.
Applying for a new loan or a new credit card.
Whenever you apply for new credit, whether it is a loan or a credit card, the creditor is most likely going to do a credit check before they make a decision of offering you credit. This is what is called “a hard credit inquiry”. You are required to authorize the creditor to do this.
A hard inquiry reduces your credit score by a few points. It’s really not something you should worry about, but, look at it this way: if you have applied for several loans within a very short period of time, then you appear very desperate for credit. This is something that your creditors are keen about.
There are many other factors that contribute towards having your credit score go down, and if you are asking yourself why did my credit score go down?, we hope that we have given you a glimpse as to the reason why. The faster you try the resolve these issues, the better things will be for you and your credit score.