Top 5 Reasons Your Credit Score Dropped

🔎 Unraveling the Mysteries of Your Credit Report 📉

There you were.... finally ready to make your next big purchase. You've filled out the application for that new credit card and hit submit. Your heart racing with anticipation. You've waited so long to finally make this purchase. As your dreams of the possibilities flutter in your mind, you are suddenly interrupted by the phrase, DECLINED....

Now a tidal wave of emotions is crashing over you...But WAIT! HOW? WHY? WHAT JUST HAPPENED?!?! You think to yourself, I'm good at paying my bills, I don't have any debts, right? Then you think.... well, there was that one medical bill, but that was supposed to be covered by insurance. A little embarrassed, you ask the salesperson for answers, but they simply reply, "you should get something in the mail with an explanation in 7-10 business days." What? You don't want to wait 7-10 business days you want to know now!

In this article we're going to unpack your emotions and unravel the mystery of the 5 most common reasons your credit score dropped. We understand how devastated you feel, but don't worry, I'm here to offer a few solutions to get you back in gear. Join in as we navigate the emotional rollercoaster of credit rejection and provide insights to help you arise from the crushing blow of being declined, and get back in the ring of great credit standing.

To start out, let's set some groundwork for how creditors get the scores. A credit score is a calculation based off information collected on a credit report. It's essentially a report card about your financial position. Now, there are 3 main companies that compile these reports, Experian, Transunion & Equifax. For now, that's all the information we need to know about them is that they have a report and based on the information a 3 digit score can be calculated. In fact you don't just have one three digit credit score, you have hundreds. Most are graded within a similar range, but for now we will simplify things by stating that the range we are talking about today is between 300-850. We have other articles that will go deeper into scoring models, variations, and how your information is collected, but for now it's just important that you know the basics that a score is created from 1 of 3 reports.

Now we are ready to reveal the top 5 reasons why your credit score dropped, and caused your heartache and emotional rollercoaster in line at the store.

1. Late or Missed Payments: The Silent Culprit

Late or missed payments are like stealthy ninjas in the world of credit. You may not notice them at first, but their impact is swift yet painful. Whether you didn't get the statement in the mail or you forgot while you were out of town, these lates can cause an immediate decline in your ratings and many people end up bearing the setback and drop in points for 12-24 months, depending on how fast they can get back on track. Since payment history is the single largest factor in your credit score at 35%, it's vital that you get payments back on track as soon as possible. Late payments can be tricky as they are actively reported accounts, the creditor is less likely to forgive the error unless it's handled right out of the gate.

If you have a recent late payment it has a higher negative impact than if it was a few years old. Don't worry, you have options. Consumers have the ability to challenge errors on their credit reports. I want to make something clear, just because the account is yours and you had a late payment, doesn't mean it doesn't have errors. You can review your rights in the Fair Credit Reporting Act (< link to all 117 pages) to create and submit your own disputes or you can contact a credit pro to discuss your options. We have a list of top credit repair professionals here.

2. High Credit Card Balances: Balancing Act Gone Awry

Your credit card balances are a delicate dance, and tipping the scale too far can have consequences. This area is calculated by an equation called credit utilization ratio. Basically they look at how much money you have spent and divide that by how much money you are granted from the creditor. Maintaining a healthy balance, under 30%, will keep your credit score in harmony.

3. Closing Credit Accounts: The Unseen Fallout

Closing a credit account you aren't using may seem like a simple decision, but it can have unforeseen consequences on your credit score. There are 2 major factors to consider. The average age of your account is worth 15% of your score. Additionally, there could be significant consequences to your credit utilization ratio. This ratio is worth 30% of your score and it's calculated by dividing your balance by your limit. Not only is it calculated on each card individually, but all the cards combined overall. Closing a card would decrease the limit side of your ratio, and tip the scales to a higher utilization ratio meaning a lower score.

4. Applying for Too Much Credit: The Inquiry Conundrum

Every time you apply for credit, a new inquiry is added to your report. Multiple credit inquiries over a 12-24 month period can lead to a diminished credit score. You should minimize credit inquiries to when you are ready to apply for a card, instead of checking to see if you could qualify. If you want to see where your scores are, here is a link to a 3 day trial of your score.

5. Positive Payment Information Expiring: The Shadow of Inconsistency

The final reason why your credit score dropped is because you had an account with good payment history fall off your credit report. Since good credit accounts stay on your account for 10 years before falling off, this means that your good paying account has been closed for 10 years after the last payment was received or in the case of credit cards, cancelled by the creditor for inactivity or yourself voluntarily.

Navigating the Confusing World of Credit: A Path to Recovery

Understanding the reasons behind a credit score drop is the first step toward recovery. We hope this article provided valuable information that will help you take actionable steps to improving your credit scores. Whether you are starting credit new, or rebuilding your credit from past mistakes, know that having a low credit score doesn't make you a bad person. It may be embarrassing, but there are options. If you have more questions about your credit, check out some of our other articles or reach out to a trusted group of credit improvement specialists at Credit Score Advocates.

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