Having poor credit hinders you from numerous opportunities, such as getting loans and applying for mortgages. While average consumer credit ratings are improving, this may not be the case for everyone. Here are several reasons why your credit score may have plummeted recently.
Missing a Payment or Paying Late
The single most critical aspect affecting your credit score is on-time payments. It is responsible for 35% of your FICO Score and 41% of your VantageScore. Late payments might harm your credit score.
You may be charged a late fee if you miss your credit card payment due by a day or two and then complete the payment on time, but your credit score is unlikely to suffer. Before reporting a late payment to the credit bureaus, most issuers give you 30 days (some may allow as much as 60 days). However, if it is reported late, your credit score may fall by 90 to 110 points.
A Maxed-Out Credit Card
The term “utilization” refers to how much of your credit you’re utilizing relative to how much you have available on your credit line. For example, suppose you have a $1,000 credit limit and a $300 amount on your credit card. That implies you’re using 30% of your available resources. Personal financial experts recommend that you maintain your credit usage below 30%, and the closer you go to zero, the better.
A Reduced Credit Limit
Your credit card issuer has the authority to cut your credit limit or even terminate your card at any moment, which may come as a shock if it occurs to you.
Your usage will suffer if your credit limit is reduced or your card is terminated while you have a balance. For example, if you have a $300 balance on a $1,000 credit limit card and your credit limit is reduced to $500, your credit usage increases from 30% to 60%.
Applying for a New Credit Card or Loan
When you apply for a loan or credit product, such as a mortgage, auto loan, personal loan, or credit card, the mortgage lender will usually run a credit check, which will result in a hard inquiry on one or more of your credit reports.
A hard inquiry might lower your score by 5 to 10 points and is reported for two years. Even if you’re accepted, simply requesting credit will lower your credit score.
It’s also worth mentioning that 10% of your credit score is made up of new credit. Rapidly creating multiple new credit accounts might signal that you’re having financial difficulties to a lender.
Wrong Information in Your Credit Report
Incorrect account information, such as a mistake in your bill payment history, can also hurt your credit score. Check your credit reports annually at annualcreditreport.com. By law, you are entitled to one free credit report per year from each credit bureau, and the agencies are delivering free weekly reports until April 2021.
Bankruptcies or Foreclosures
A bankruptcy or foreclosure can significantly negatively impact your credit score, especially if you skipped payments leading up to the event.
A Chapter 7 bankruptcy will be on your credit reports for ten years, whereas a Chapter 13 bankruptcy will appear on your credit records for seven years. The date of your first missed mortgage payment that resulted in the lender foreclosing on your house will appear on your credit reports for seven years.
Paying off an Existing Loan
While paying off a loan is a good thing, it can lower your credit score by reducing your credit mix, which accounts for 10% of your credit score. Your credit mix considers if you have both revolving and installment credit, such as credit cards and mortgages, vehicle loans, and school loans.
If your credit score has recently taken a hit, there’s a good chance it results from one of the above factors. If you’re able to resolve whatever issue has led to the drop in your credit score, you may be able to reverse the trend.