If you don’t have much — or any — experience with credit at this stage of your life, you may wonder why people worry if their credit scores go down. Put simply, without a good credit score, your ability to get credit at an affordable rate will likely be severely limited. “Creditors want to lend money to people who they believe are likely to repay their loans so that they can keep on making money — not losing theirs,” said Matthew Jimenez, CEO of My Credit Repair Clinic. “So lenders use your credit score as a reference when deciding whether someone can get a loan, and what interest rate should be charged on that loan.”
Your credit score is made up of a variety of factors that are weighted according to the credit scoring model being used. The most common credit-scoring model to date is FICO, created by the Fair Isaac Corporation, which is used by over 90% of top lenders.
And while most people know that irresponsible use of credit can cause your credit score to dip or even plummet, bad credit behavior isn’t the only reason your score might go south.
“FICO scores can drop for a number of reasons — even when you’re in great financial health and do a good job of managing your cash flow well,” said Eric Roberge, CFP and founder of Beyond Your Hammock. “This surprises a lot of our financial planning clients who make above-average incomes and may not even have any consumer debt to their names.”
Last updated: May 21, 2021
Poor Payment History
“One of the main things that can have a severe impact is your payment history,” said Stephen Weyman, co-founder of creditcardGenius. “Lenders typically provide ratings for borrowers to the credit bureaus depending on whether their payments are made on time. Making late payments to your credit card or missing out on them completely will also be reported to the credit bureaus. These records often remain in your credit file for seven years and can negatively impact your score, which, in turn, can prevent you from qualifying for loans or low-interest rates as you’re seen more as a risk to the lender.”
Hard Credit Inquiries
“When people are looking to secure a loan, open a credit card, consolidate debt or get financing on a car or other major purchase, this will almost always require a hard credit inquiry, which can cause your credit score to go down,” said Carter Seuthe, CEO, Credit Summit. “People often don’t realize the difference between a hard and a soft credit inquiry, and less-scrupulous companies will hide this information in fine print.”
According to Experian, hard inquiries can reduce your credit score by five points or less. The better your credit is, the less impact this type of inquiry will have. And your score should rebound within a few months. However, if you apply for several different loans or credit cards within a short period of time, your score could drop 15 points or more.
Closing a Credit Card
While you may never use a credit card — or maybe you paid it off and don’t want to use it because of unfavorable terms — closing that account is one of those things that can mess up your credit score.
“Closing a credit card can also impact your score,” said Ann Martin, director of operations of CreditDonkey. “When you close a card, you shorten the total amount of your credit limit, which affects your utilization ratio. FICO counts credit history as 15% of your score.”
Having Too Many Open Lines of Credit
You may be tempted at some point to open various accounts, but it could hurt your credit score for more than one reason.
“If you open up multiple new accounts, not only is that a hard inquiry that will hurt your score each time, it’s also decreasing the average age of your open lines of credit,” said Daniel Rodriguez, director of operations at Hill Wealth Strategies. “The most favorable ratings go to people that have an average age of credit history at nine or more years, while an average age of less than four years typically has a negative impact.”
“One of the biggest reasons for a credit score drop is credit utilization,” said Roberge. “If you use more than 30% of your available credit all at once, this can cause your score to drop (sometimes significantly). For example, say you have a $10,000 credit limit. If you make a $7,500 purchase, that takes up 75% of your available credit, and you may see your score drop after that purchase posts. It doesn’t matter if you have the cash available to pay for your purchase or pay off the card on time and in full and therefore don’t actually incur any debt or owe interest. It can still negatively impact your score simply because you used up a large amount of your available credit.”
But Roberge says the damage is not permanent.
“The good news is that your credit score should eventually recover, but for the most part, you want to monitor how much of your available credit you use at any one time and keep that usage to 30% or less of your total credit limit,” he said.
You Fail To Use Your Account
“If you leave an account inactive for over a year, and in some cases less time than that, the lender will send you a beautiful letter saying ‘thank you for your business; we appreciate it, but we already decided to close your account due to inactivity,”’ said Adrean J. Rudie, a professional of 30 years in finance, mortgage, real estate and book author. “This drops your score without your consent.”
“But you’ve also got to use those accounts,” she said. “Nobody likes being ignored. Set it up on your calendar twice a year, or at the very minimum once a year to charge something small on the card even if you’re not going to use it long-term. Basically, babysit the account and buy something small and pay it right off on the next billing cycle. This will trip the computer to show activity and continue on.”
A Lender Closes Your Account Due To Factors Out of Your Control
“Sometimes lenders do an internal risk assessment and will just arbitrarily go through and close people’s accounts,” said Rudie.”This will also make you appear heavier leveraged and drop your FICO credit score. Try to keep your overall balance against all your credit lines at 30% or below. Obviously, make sure you’re making your payment on time.”
Case in point: In 2020, approximately 70 million people — over one-third of credit cardholders — had their credit limit reduced or their credit card account closed between mid-May and mid-July, according to a Lending Tree Survey. The most common reasons for reductions or closures, according to the survey, include credit score decreases, inactivity and missed payments.
Foreclosures, Bankruptcy and Past-Due Child Support
“These are extreme examples, but they have the greatest impact on a credit score,” Rodriguez said. “Foreclosures can drop your credit score by as much as 160 points alone and stay on your report for seven years. Bankruptcy can stay on your record for up to 10 years and can drop your score by more than 200 points in some cases. Past-due child support can also drop your score by more than 100 points and stay on your credit report for up to seven years. Basically, when circumstances get to this point, it means that payments have been missed for so long that they have already hurt your credit score along the way and been referred to a collection agency to try and retrieve the debt. By the time a collection agency gets involved, a lot of damage has already been done at that point.”
Car Repossessions and Short Sales
“Car repos report as a collection, which decreases your score as well,” said Vanessa Perry of Impeccable Credit Services. “A short sale on your home will always report as a settled-for-less-than-the-amount foreclosure. Contrary to popular belief, a short sale is still reported as a foreclosure. Many realtors will say that it will help your credit, but it does not; it only hurts your credit.”
Errors on Your Credit Report
“Errors on your credit report can be another quick way to drop your score,” said Tony Wahl, director of operations at Credit Sesame. “If you see any incorrect marks on your report, be sure to dispute them with the credit bureaus as quickly as possible. When you take the time to understand what affects your credit score, you’re taking the first steps toward having better control over your finances.”
Here’s how you can get a free credit report so you can stay on top of what’s going on with your credit.
What You Need To Know About Improving Your Credit Score
“The impact on scores of any given change will differ depending on the individual’s unique credit history and the credit scoring system being used, ” said Rod Griffin, Experian’s senior director of consumer education and advocacy. “The combination of factors and the person’s credit history affect how many points a score may decrease and how long it will take to recover. The risk factors provided with the credit score you receive are essential to understanding what most affected the number based on your unique credit history. The risk factors describe what, from your personal credit history, most affected the score. They are typically listed in order of importance. Focus on those risk factors to take steps to improve your scores over time. They tell you exactly what you need to work on.”
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How to improve your credit score in 2021: Easy and effective tips
If you’ve ever wondered “What is my credit score?” it’s probably time to find out. Having a good credit score can make life a lot more affordable. If you’re about to buy a house or car, for example, the higher your credit score is, the lower your interest rate (and therefore, monthly cost) will probably be.
Your number may also be the deciding factor for whether or not you can get a loan and ultimately determine if you are even able to buy something you want or need.
So, yes, the goal is to have the highest possible credit score you can, but increasing the number doesn’t just happen overnight. There are important steps to take if you want to increase your score, and the sooner you start working on it, the better.
“If you’re trying to increase (your credit score) substantially to accomplish a goal, you’re really going to have to have as much lead time as possible,” said Thomas Nitzsche, director of media and brand at Money Management International, a nonprofit financial counseling and education provider that advises people on how to legally and ethically improve their credit score on their own.
If you have fair credit and you’re trying to improve the number for a house purchase, for instance, you’ll want to start working on it at least a year in advance, he explained to TMRW.
But even though that sounds like a long time away, you can (and should!) start doing things right now to bump that number up. Below, see seven things you should do — and not do — to help improve your credit score:
1. Review your credit report
The first thing you’ll want to do is pull up a copy of your current report so you know where you stand. You can get free reports from all three agencies — TransUnion, Experian, and Equifax — at annualcreditreport.com. Nitzsche said it’s important to take a moment and understand the financial snapshot of where you are today and where you want to be.
You’ll also want to take some time and look for any errors on your report, which could negatively impact your score. “If your name is misspelled, that’s not going to hurt your score,” he explained. “But if you see a late payment or missed payment (that’s in error), or maybe you have an account that should be reporting but isn’t, then that’s a problem and that will impact your score.”
If there is an error, you should dispute it and try to provide as much proof as you can.
One other thing: You can also ask a creditor to remove an issue if it’s been corrected (i.e., if you paid off a collection debt). Nitzsche said it doesn’t hurt to ask and the worst thing they could say is no.
2. Have good financial habits
“The biggest part of your credit score is payment history, so the most critical thing is never missing a due date,” Nitzsche said. Set up a monthly autopay or add all due dates to your calendar so you never miss a bill.
You can also achieve a higher score when you mix different types of accounts on your credit report. It may seem counterintuitive to get extra points for having debt in the form of student loans, mortgages and auto loans, but as long as you’re paying them off responsibly, it shows that you’re reliable.
3. Aim to use 30% or less of your credit at any given time
Know your credit card limit, and try not to use any more than 30% of that number each month, otherwise your score could lose points for too much credit utilization.
Another thing you can do is ask your bank to increase your limit. “That will give you more flexibility to spend more,” Nitzsche said. You could also pay it off twice a month to keep the balance low. But he does warn that you never know when the balance is going to be reported to the bureau. It can happen at any point during the month, so it might be the day after you make the payment or the day before. “You don’t necessarily want to use the card and pay it the next day because that doesn’t give the bureau the chance to know that you’re using it,” he said.
4. Avoid requests for new credit
If you’re looking to increase your score around the time you want to buy a house or car, you won’t want to open up a new line of credit, like a retail card, credit card or loan. That’s because “hard” credit inquiries like those can lower your score, and sometimes it comes down to a few points over whether you’re approved or what your rate will be, Nitzsche said.
“Soft” credit inquiries, like when an employer checks your credit or when you pull your own report, won’t affect your score.
5. Keep all accounts open, even ones you don’t use anymore
Even if you don’t use that credit card from college, it’s a good idea to just keep it open because closing it could hurt your score. Nitzsche explained that you’ll be dinged some points for each account that is closed. If you want or need to mentally break up with a card, just cut it up instead.
6. Build your credit if needed
If you haven’t established credit yet, you might not even exist … in the credit report space, that is! “If someone has never fallen in delinquency on any subscriptions or utilities or never had collections on anything and they have not utilized credit cards or loans in the past seven to 10 years, they may not have a credit profile at all,” Nitzsche said. “That presents a challenge when you want to buy a home.”
If this sounds familiar, you may have to get a secured credit card where you put down a deposit, he advised. “You still have to make payments and use it responsibly. Not all banks offer them but you can usually check with your local bank or credit union.”
7. Reach out for help
There are many apps and credit-monitoring services that can help you stay on top of your credit score. You could also reach out to a professional credit counselor who can help you navigate your specific situation. (Here’s a good resource about finding a reputable service.)
One last thing: Nitzsche warned that everyone should beware of credit repair scams that claim to be able to increase credit scores for an advance fee to get accurate negative information removed (even temporarily) from credit reports.
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