When you check your credit score and you discover it has dropped, you may wonder what could have happened. Some people think paying their bills late is the only red flag when it comes to credit cards. You might think you are doing everything right and there is no reason as to why your credit score will drop. Maybe, maybe not. Knowing the numerous reasons why your credit score could drop is important, so you can know what you are doing wrong and adjust accordingly. 

What are the Debts that Determine Your Credit Score?

First off, your credit score is what lenders look at to decide whether they should lend you or not. It is  based on things like how often you pay your bills on time, how much debt you have, and how long you’ve been handling credit. So, if your score is dropping, something in that mix is probably off.

The main debts that affect your credit score are your credit card balances, your loans (like car loans or student loans), and your mortgage.

When you use a credit card and don’t pay off your full balance every month, this can lower your score. For loans and mortgages, if you make your payments on time every month, your credit score will increase especially if you keep other rules that guide credit use. Missing payments have a high impact on your credit, therefore in all you do, don’t miss your loan payments.

Possible Reasons Why Your Credit Score May Drop

Missing or Late Payments

One of the most common reasons your credit score might be dropping is missing or making late payments. Your payment history is a major part of your credit score, it accounts for about 35% of your total score. Every time you miss a payment or pay later than the due date, you may experience a drop in your credit score. TransUnion and Equifax see late payments as a sign of unreliability in managing debt, which will send a message to lenders that you are a higher risk borrower. Even if you catch up on your payments, the history of late payments can remain on your credit report for up to seven years. To avoid late payment, set reminders for due dates or set up automatic paymentst, so you don’t miss payment.

High Credit Utilisation Ratio

Using a high percentage of your available credit can also lead to a decrease in your credit score. Lenders don’t expect you to use up all credit. Your credit utilisation ratio is the percentage of used credit against total available credit. If you have $100 as available credit, if you use $50, your credit utilisation ratio is 50%. Meanwhile, if you don’t want your credit score to drop, don’t use more than 30% of your total available credit. If you consistently max out your credit cards or even use a high percentage of your credit limit, lenders see this as a sign that you are over-dependent on credit and may struggle to manage your debts. High utilisation will not only affect your score but also alert lenders that you might be at risk of defaulting if they give you a loan. To improve your score, try to pay down existing balances, and keep your spending in check by using a smaller portion of your credit limit.

Applying for Multiple Credit Lines

Every time you apply for a new line of credit, e.g. a credit card or loan, the lender performs a hard inquiry on your credit report. Hard inquiries can temporarily decrease your credit score. Applying for several lines of credit within a short period can lead to too many hard inquiries. This is because it may appear to credit bureaus and lenders that you are desperately seeking credit or facing financial instability. To maintain a healthy credit score, it’s advisable to space out your credit applications and only apply for new credit only when it is absolutely necessary.

Closing Old Credit Accounts

It might seem normal to close old or inactive credit accounts, but doing so can actually affect your credit score. Closing these accounts can shorten your credit history, especially if the account was one with a long, positive record of managing credit. A longer credit history is good for your score, because it is the evidence that you can manage money. 

Bottom Line

A high credit score can lead to lower interest rates on loans and credit cards. Whether you’re applying for a mortgage, a car loan, or looking to refinance student loans, a better credit score can save you a lot in interest payments.

If you have overwhelming debts and are worried about how to manage them, look no further. At EmpireOne Credit, we offer a friendly, non-judgemental, and confidential consultation. Your debt can be reduced by up to 80%, and interest will stop immediately. Call us at (416) 900-2324 to schedule a free consultation with us. Being debt-free feels good!