Your credit score can help you get a loan, buy a home, and get the best rates and terms for a variety of financial benefits.
Sometimes, your credit score can drop, causing you to worry and wonder exactly what happened.
Before you panic, read on to learn more about why your credit score goes down and how you can fix it. This guide will help you determine why credit scores fluctuate so you can be prepared.
Your Credit Usage Increased
When you use a lot of credit in comparison to the amount of available credit you have, it can cause the score to drop. Ideally, your credit card utilization rate should be in the range of around 30 percent or less. The lower the utilization, the higher your score.
If you find that your score recently tanked, it could be because you bought that $600 plane ticket using a credit card. Pay close attention to your spending and try to repay the card back down to reduce the utilization rate.
Creditors want to see that you’re responsible for your available credit. When you use a lot of what’s available, it’s an indication that you might be in need of financial help to pay for things or that you’re not responsible when it comes to the credit you’ve already been given.
You Miss a Payment
If you accidentally miss a payment (or two), it can cause your credit score to decrease significantly.
Missed payments will be reported to the credit agencies, which in turn results in a lower score.
Some people experience drops of 100 points or even more if they miss a payment. To prevent this from happening to you, always be sure that you make your payments on time.
One easy way to ensure that you never miss a payment is to set up automatic deductions. Go to your account and look for the feature that allows you to set up automatic payments, and you’ll never need to worry about this problem again.
If you live paycheck-to-paycheck and can’t set up automatic payments, create a calendar reminder on your phone or computer. This will alert you in advance when a payment is due, so you don’t forget.
Just one missed payment can do serious damage to your credit score. If this happens to you, there’s no need to panic. Simply continue to make your payments on time moving forward and your scores should slowly start to increase again.
You’re in Collections
One surefire way to know why your credit score goes down is if you have an account in collections.
Anything that reports back to the credit bureaus as being in a collections status will make your score drop.
If you are late on a payment, do your best to contact the creditor and make arrangements. If you let things go into collections, it will end up causing your score to drastically drop and prevent you from getting things like a mortgage or other large purchase.
Contact your creditor and make sure you pay the collection in full as soon as possible. Some companies will remove the negative information from your report as soon as you pay everything off, but be sure you get this in writing. A collection “ding” is never a good thing in the eyes of credit holders.
Why Your Credit Score Goes Down with Derogatory Marks
A derogatory mark means that you have a serious form of financial delinquency somewhere on your record. These negative marks can be a result of a variety of different problems ranging from simple slow pays to foreclosures and tax liens to federal judgments.
There are other forms of derogatory items including defaulted student loans and bankruptcy. Do your best to rectify any derogatory marks as soon as possible since this can have a major impact on your credit score and your future.
Always keep a close eye on your credit report and be on the lookout for any significant changes.
Sign up for credit monitoring so you will be alerted when anything unusual shows up. The sooner you can address these types of issues, the better it will be for your score.
You Applied for a Home, Car, or Loan
Major purchases like houses, vehicles, and financial services like personal loans require what’s called a “hard pull” on your report. The lender will pull your complete credit report to help them determine if you’re credit worthy.
When a hard pull is done, it can cause your score to temporarily go down. Usually, this type of ding won’t reduce your score by much, and it should bounce back within a month or two.
If you’re shopping for a mortgage, you have 30 to 45 days to get as many rate quotes as you can without it affecting your score. Find out what an inquiry does to your score so you can be prepared if you plan to get other forms of credit, too.
Be Smart with Credit
Once you know why your credit score goes down, you can take proactive steps to prevent it.
Remember that not all dips in your score last forever and you can usually recover in a short period of time as long as you take care of any problems.
Try to keep your credit utilization low and do your best to never miss a payment. Enroll in a credit monitoring plan to help you keep a close eye on your scores and your credit report.
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