You’ve been paying all of your credit card and loan bills on time, and you’re hoping to see an improvement in your credit score. But much to your dismay, you check your credit score and see that it dropped instead. It can be frustrating when this happens, especially since you thought you were doing everything right. There could be one single incident that has caused your credit score to go down, or it can be several different reasons. Some of these credit score drops can be temporary; other times, it might take a long time before it improves. Although it can be difficult to pinpoint, the following are some possible reasons why your credit score went down:
Credit report errors
If you only looked at your credit score, but not your credit report, you might want to request your free annual copy if you haven’t already. Look through your credit report carefully and make sure that everything makes sense. You might have thought all of your bills were being paid on time, but perhaps there was an account you completely forgot about and now it’s a negative mark on your credit report. Or perhaps you missed a bill in the mail, such as a medical bill, and now it’s been turned over to a debt collector. Anything negative on your credit report can cause your score to go down, and there might be things on there that you aren’t even aware of. Make sure you recognize anything negative on your credit report, and that the accounts seem correct and that the charges are accurate. It’s not uncommon for credit reports to contain errors, so if you think your credit report is squeaky clean and you notice something you don’t recognize at all, take action to dispute it immediately. Any negative mark or error on your credit report—even if it’s a minor one—can be enough to bring down your credit score.
Hard credit inquiries
If you apply for a loan or credit card, this will affect your credit score because it is a hard inquiry. Even just a single hard inquiry can bring down your credit score, and if you’ve recently applied for a lot of loans, you could see a big drop in your credit score. Although this drop is usually only temporary, the negative effects can linger if you’re constantly applying for credit—which won’t help your chances of getting approved, either. This is why you should carefully consider anything you’re about to apply for and only apply for credit sparingly.
Large amounts of debt
Paying your bills on time each month is a good habit to fall into, and will stop you from defaulting and facing more serious consequences. However, if your payments are small and you’re barely making a dent in a large balance, your credit score can eventually go down. Credit reporting bureaus don’t just look at your payment habits when calculating your score, but they look at how much debt you’re in. If you’re making small, minimum payments each month on credit cards that are maxed out or very close to their limit, this won’t help your credit score. If you can’t afford to pay off your credit card balances in full, try to at least pay a little bit more than the minimum. Additionally, avoid making charges on those cards each time you get a little bit of available credit. Once you bring your balances down, you should eventually see an improvement in your credit score.
On the other hand, maybe you did pay off all of your credit card debt. While this alone can help improve your credit score, if you actually canceled any of your credit card accounts (especially your oldest credit card), you could see a drop in your credit score. Another factor that credit reporting bureaus take into account is credit history. If you have no active accounts, or your only accounts haven’t been active for very long, your credit score could take a hit. If you do end up paying off your oldest credit card, reconsider canceling it. Even if you never use it again, simply leaving it active can help keep your credit score up.
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Nothing above is meant to provide financial, tax, or legal advice. You should meet with appropriate professionals for such services.