Why Did My Credit Score Drop Like a Rock?
When was the last time you checked your credit score? Maybe it doesn’t seem that important. You’re not planning on buying a home or vehicle this year, so why would you go to the trouble to obtain credit report information on yourself? Then you notice your credit card company offering to tell you your score, or you finally get that Member Key from Goalry so you can take more effective control of your personal finances (and because you’re excited about whatever they’re revealing in April of this year!) and figure it can’t hurt to check.
The Store to Keep Track of Your Credit.
Lo and behold (or should we say “low and hold-on-just-one-second”?!), it’s… it’s dropped? Oh the humanity! Darn you, whichever political party I blame for everything as I shake my fist at the sky in outrage! How can this be? I’ve been such a good boy or girl this past year, especially considering how rarely it’s been a good year back at me! What made my credit score go down?
I am truly bathed in shame and ignominy… whatever that is. Also, I’ll have to look up “ignominy.” *sigh*
Why Did My Credit Score Drop?
Once you’ve calmed down a bit and your heartrate is back to normal (seriously, you’d think we’d all be so used to stress and bewilderment by now that it wouldn’t even phase us), let’s look at a few possible reasons your credit score dropped so noticeably. To do that, it’s probably best to review the things that go into computing your credit score in the first place.
What Affects My Credit Score?
There are minor variations among the different major systems, and some built-in wiggle room even within each approach, but for our purposes the big stuff works pretty much the same across the board. Here’s a brief recap of the major credit score factors:
Making Payments on time
This one should be obvious. How good are you at paying your bills on time? Whether it’s credit card payments, car or truck loans, your mortgage, utilities, rent, or anything else, late payments which get reported to the major credit bureaus impact your scores more than probably any other single factor.
Not all creditors report to all three of the major credit bureaus, and not all creditors report the same sorts of delinquencies in the same way. Generally, however, late payments are categorized as 30+ days past due, 60+ days past due, 90+ days past due, and written off or turned over to collections. As you might imagine, the later your payments, the worse the impact on your credit score.
Total amount owed
Depending on who’s doing the computing, your existing debt and available credit lines may be handled slightly differently. The important thing is to recognize that maxing out your cards or pushing your available credit as far as it will go puts a serious drag on your credit score. Since the whole point of the score is to predict your ability to reliably repay a new loan, knowing you’re stretched to the max already isn’t encouraging to lenders. Knowing the total amount you owe to all creditors may be useful, especially if measured against your reliable income, but your debt-to-credit ratio is by far the more important number.
If there’s ever actually another round of stimulus checks sent out, and you qualify, and if you use that money to pay down existing debt, you’ll most likely see your credit score take a small leap in the good direction within about 30 days. That’s because of this element of the equation.
Length of your credit history
How long have you been utilizing credit successfully? Part of what makes it difficult for young people to borrow on good terms isn’t that they have a poor credit history… it’s that they have little or no credit history at all. This is sometimes cited as one reason it’s a bad idea to try to avoid debt altogether and pay as you go. If you ever do need credit – say, to buy a home or finance major repairs – you might not be able to secure good terms because you have little or no credit past.
Recent Loans or applications for credit
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While soft credit checks (the kind you run on yourself when you check your credit score for free or which an employer runs before deciding to hire you) don’t impact your credit score, hard credit checks (the kind which are used to determine what sort of financing to offer you on those new kitchen appliances or that used car loan) very much do. A few hard credit checks aren’t a big deal. They’re a normal part of modern American life. A half-dozen in the past year makes lenders nervous, whether you were approved or not.
So, My Credit Score Dropped... Why?
Now that we’ve covered the major credit score factors, let’s get back to our original question. Why did my credit score drop? Here’s where I’d start looking so you can figure out how to fix it.
1. Have You Overlooked Payments or Allowed a Contested Debt to Go Unpaid?
I realize this one sounds a bit obvious, but that’s exactly why we’re starting with it. Life gets crazy, and it’s easy to overlook things that should be no-brainers in normal circumstances.
Are you behind on a car payment? Have you maybe missed a notice somewhere that an automatic debit you set up to pay the cable bill or mortgage hasn’t been going through for some reason? I had a subscription last year which was automatically charged each month to one of my credit cards. The card expired over the summer and I received a new one without thinking much of it, but I neglected to change the information on the subscription. The emails from the company were filtering into promos and such – not as spam, but not with the stuff I pay much attention to most of the time. I ended up two months behind on a subscription I could have paid out of the family change jar if I’d been paying attention!
Maybe you have medical bills you’re still hoping insurance will pick up the slack on, but your doctor’s billing department isn’t as optimistic as you are? Maybe you’re contesting that ridiculous charge from the cell phone plan your ex-husband defaulted on and for some reason they think it’s your problem, and they’ve reported you as delinquent? The point is, look for the obvious stuff first – who might have reported you for non-payment, fairly or otherwise?
The best solution is not to miss payments or let debts go unresolved in the first place. Actually read through your monthly statements when they arrive in the mail or in your email. Pay attention to recurring charges or notices regarding your debts. Call your creditors sooner rather than later and do your best to work out payment arrangements, or at least to let them know what you’re doing to try to make sure they get paid. You’d be surprised how many things open, timely communication can solve.
2. Have You Made Any Major Purchases Recently?
There’s nothing wrong with buying stuff you need when you need it, especially if you’ve budgeted for making those payments in a timely fashion every month. Even using credit responsibly, however, impacts your debt-to-credit ratio. Just like withdrawing money from your checking account means you have less money in the account to spend, utilizing your available credit means you have less credit – at least temporarily.
One way to avoid this is to plan for major purchases through saving rather than using your credit.
This isn’t always possible, of course, but it’s more possible than we sometimes like to admit because it requires patience and a little budgeting – you know, stuff grown-ups do because we’re adults and stuff.
If possible, at least try to space out major purchases so they’re not hitting your credit report all at once.
As you make your payments faithfully each month and keep doing everything else you’re supposed to be doing, that score will creep back up, don’t worry.
Why did my credit score drop? Maybe it’s because I’ve been using my credit lately. Oh, yeah – that makes sense!
3. Have You Applied For a New Card or Other Financing Lately?
Let’s say you currently have three different credit cards – two major names and a department store card, for example. You’re paying fairly high rates on all three, and you’re not going to that department store as much these days so the perks don’t offset the interest. You find a great deal on a lower interest card that offers a ridiculously low rate on balance transfers for the first twelve months and you have a plan for paying everything off in that time frame. You apply and you’re told you’ll have the answer in 48 hours or less.
The next morning, you’ve agreed to go with your adult child to the car dealership to cosign on a loan for him. You know he’s good for it, but his credit hit a rough patch a few years back while yours is pretty strong – you know, because you check it regularly. The dealership runs your credit and while it’s still decent, it’s lower than only a few days ago.
You ask the finance guy, “Why did my credit score drop?!” and he points to the report where it shows you’ve recently applied for even more credit than you’re using right now – a new card.
If it were a week or two later and you’d already consolidated your debt onto the new card, then locked the higher interest cards in your home safe so you’re not tempted to use them unnecessarily, your score would be even better than it was before. At the moment, however, you’re caught in the no-no zone – applying for two major lines of credit within a day or two of each other. You may still be approved, but the terms probably won’t be quite as good as they would have been otherwise. One move is actually to improve your credit situation, and the other is primarily to help out a family member, but on paper, it can mean a negative hit to your score temporarily.
It wouldn’t hurt to briefly explain the situation to the finance guy, by the way. You never know when the person in front of you just punches in the numbers and when they actually have plenty of personal leeway to adjust the offer as they see fit. Also, try to plan a little better next time, yes?
4. Have You Paid Off Any Loans or Closed Any Credit Cards?
This one is a bit counter-intuitive. Just like applications for new credit, whatever the reason, can put a drag on your credit score, closing out existing credit can have a negative impact as well. Here’s why.
Remember above when we talked about debt-to-credit ratios? If you have a credit limit of, say, $5000 on a major credit card and you’ve paid it down to a few hundred dollars, you have thousands of dollars in available credit you’re not using – and credit score math loves that. There’s a similar bump near the end of a personal loan you’re almost done paying off. Close the card or eliminate the loan, and that “available credit” essentially goes away. Sure, you have less debt – but a few months ago you had roughly the same amount (since you were almost done paying everything off) and still had this huge potential credit shining in the distance like a beacon of responsibility and worthiness.
Now you just have… well, fond memories of all that debt you used to have, I guess.
Why did my credit score drop? Well, it dropped because you sorta have “less credit” now than you did before – odd as that may sound.
It’s not bad to pay off debt. Just be aware of this wrinkle in the system. This is why many experts suggest keeping open the cards you pay off or transfer balances away from, but putting them somewhere safe so you’re not tempted to use them. That potential spending you’re not using bumps up your score.
5. Are There Any Errors on Credit Report or Have You Been the Victim of Identity Theft?
No one wants to think about these scenarios, but they do happen. It’s always worth reading through your credit report and contesting anything you don’t believe should be there. Sometimes it’s an honest mistake and should be resolved. Other times, well… there are companies out there notorious for going after debts so aggressively that they’re not above reporting you for your ex-husband’s cell phone bill or trying to milk some of the medical debt you’ve already resolved with the provider. Thankfully there aren’t many, and the system does what it can to address such things, but you have to do your part as well by fighting for the correct information on your credit report.
Yes, it’s kind of a pain to do so. No, it’s not usually as bad as you’ve probably heard. Either way, it’s far less of a headache than letting it go and watching your credit plummet as a result.
As to identity theft, you’ve no doubt heard (or possible experienced) what a nightmare that can be. The sooner you catch it and report it and start taking whatever steps you can to make things right, the better.
When you ask, “Why did my credit score drop?” you don’t ever want this to be the answer. Just think how relieved you’ll be if it turns out your identity hasn’t been stolen – you’re just way behind on some payments because you forgot to send everyone your change of address information or something.
Who knew THAT could be the GOOD news?
How Can Goalry Help?
Our primary goal has always been helping normal people take more effective control of their personal or small business finances. We’ve always believed most of us are quite capable of doing this if only we’re provided with the same sorts of information, connections, and opportunities the folks uptown always seem to have.
That’s why we created the Goalry Financial Mall, a virtual family of interconnected sites, each dedicated to a specific aspect of personal or small business finance. You can educate yourself, ask questions, or get connected to the online institution best able to help you.
In a few short months, we’ll be unveiling something re-imagined, re-focused, and re-markable designed to help you manage every element of your finances more conveniently, quickly, and accurately than ever before. Tracking and categorizing spending, updating budgets, supervising multiple accounts, comparing loan options, choosing the right insurance, or just about anything else you can think off – all as easily as posting pictures of your lunch to social media.
Needless to say, we’re practically giddy over the possibilities.
In the meantime, keep looking around. Consider getting your own member key so your information travels conveniently and securely with you between virtual stores. And if there’s anything we can do to help, just let us know.
Why did my credit score drop? If you’ve been riding with Goalry, look again – it didn’t.