Imagine you are checking your credit score and you suddenly see a drop in it. Then, you ask yourself: “Why is my credit score decreasing?! What did I do wrong?”
Some people have the habit of constantly checking their credit scores. Maybe, you have credit score alerts that tell you whenever your credit score changes.
If this is your case, then it’s in your best interest to understand why this happened.
In fact, if your credit score increased instead of decreasing without notice, you might still be equally surprised.
That’s why here, at Oxford Funding, we will tell you the causes that led your credit score to drop.
Do not fear, there’s always a reason for it, and we are going to figure it out.
Why is the credit score important?
In our modern society, we all need loans and credits to finance things we need.
If you want to buy a house, it is normal not to have enough money to pay it all upfront. In that case, a mortgage loan is the best way to proceed.
The same situation happens with lots of things in life. Regarding the purpose of the loan you need to get, it is crucial to understand that credits are risky.
Financial institutions do not want to take chances with low credit scores because that means they might not pay back the borrowed money.
In order to reduce this risk, the credit score serves as a digit to quickly tell the lenders if you are a trustable borrower.
They can also check the credit reports, which are nothing but highly detailed information about your credit history.
All of this data is going to be used by the lenders before approving a loan.
If your credit score was good but suddenly dropped, that’s a warning sign for lenders.
Consequently, you don’t want your score to decrease! We never know when we will need a loan again, and having a good score is the key to getting approved as soon as possible.
5 reasons why the credit score is decreasing
Let’s say you checked your credit score two months ago, and it was decent. But now, you checked it, and it dropped.
In this scenario, we must not despair and identify the causes that led the credit score to decrease.
There are a variety of reasons why credit scores can drop, but there are five common circumstances that you might not know that directly affect your score.
1- Late payments
Your payment history is one of the most important things when it comes to determining your credit score.
In the FICO scoring model, payment history represents 35% of it. Remember that FICO is the most followed model by the vast majority of lenders.
Consider that if you were only a few days late, maybe this won’t show up in your report.
Nonetheless, if a payment is more than 30 days late, it will be reported as delinquent to the credit bureaus.
We know it is not easy to keep track of payments, but this is crucial for our credit score’s health, so don’t skip on them!
2- Your credit utilization rate changed
Credit utilization is nothing but how much of the credit you have available you are actually using.
Thus, if you spend more money in a certain month, your credit utilization rate will increase. Conversely, if you spend less, your credit utilization rate will decrease.
Let’s say you have a 5,000 USD credit limit, but you only use 1,000 USD. In that case, your credit utilization rate is 20%. If you now use 4,000 USD of your credit limit, the rate will increase to 80%.
We always recommend keeping the credit utilization rate below 30% to prevent our credit score from dropping.
3- There was a mistake on your credit reports
Credit bureaus and lenders are not perfect. They are run by humans, so they can commit mistakes too!
Nevertheless, it’s crucial to identify when a mistake happens in order to solve it as soon as we can.
If you constantly check your credit score and then you see something out of place, it’s your duty to report it.
In that case, you need to dispute the error with credit bureaus for it to be promptly corrected and, eventually, take your credit score back to normal.
4- You made a new application for a credit
This mostly happens when people apply for a new credit card. Card issuers need to see how much of a risk you pose before granting you a new line of credit.
We know that credit cards are a fantastic way to build credit, so you can actually take your credit score back to where it was if the credit card is given to you.
When issuers run a credit check, it’s called a “hard inquiry.”
They do this only to understand your credit history in the last 12 months in order to know if the risk is low enough to give you the card.
5- A loan was totally paid off
For some people, it might seem illogical that paying off a loan is actually a cause for our credit score to drop.
But, yes, paying off loans will cause your credit to decrease because it basically means that you have fewer credit accounts in your name.
Having multiple credit accounts and paying them on time shows lenders that you are capable of managing different types of debts at the same time.
But don’t let this be a reason to not fully pay your loans! At the end of the day, nobody wants to pay excessive interest rates charges over months.
At this point, you might already have identified why your credit score dropped.
Don’t worry, rebuilding your credit score is not a monumental task. There are multiple options that can help you take your score where it needs to be. Investigate all the alternatives and make good use of them!