If you’re in the habit of monitoring your credit scores, you’ll notice if it drops even by a few points. And you might wonder, “Why did my credit scores drop?” The answer? It could be due to any number of factors used by credit scoring models, like VantageScore, to calculate your credit scores.
Find out exactly what causes your credit scores to take a dive and what you can do to either prevent it or control the damage.
Your credit utilization increased
Credit utilization is the amount of available credit that you use at any given time. Experts in the credit field generally recommend keeping your credit utilization at no more than 30 percent. This shows lenders that you can handle credit responsibly.
For example, if you have a credit card with a $5,000 limit, you would never want to carry a balance of more than $1,500, which equals 30 percent of the credit limit of $5,000. Both VantageScore and FICO scoring models consider credit utilization to be a highly influential factor in determining your overall credit score.
If your credit utilization is above 30 percent, you should immediately work on paying down the balances of your accounts.
You could also contact your creditor to ask for a credit limit increase. If granted, it could help recalculate your credit utilization ratio.
For example, if you have a $1,500 balance on an account with a $5,000 limit, a small credit limit increase of $500, for a total credit limit of $5,500, would reduce your credit utilization to under 30 percent.
You missed a payment on one of your credit accounts
Missed payments also have a huge influence on your overall credit scores. Although being 30 days late on a payment can cause your scores to drop, payments that are 60 days late, or more, will likely have an even greater negative effect on your scores.
Other consequences of late or missed payments include expensive late fees and penalty interest rates. Keep up with payments by scheduling them in advance or setting up reminders in your calendar.
A derogatory mark was added to your reports
Negative items on your credit reports, like collections, bankruptcies, repossessions and foreclosures, can take seven to 10 years to recover from.
As of July 2017, however, all three credit bureaus had removed the majority of civil judgments and about half of all tax liens from consumer credit reports, which could have had a buoying effect on some consumers’ credit scores.
Keep in mind that derogatory items listed on your credit reports that you don’t recognize could indicate that you are the victim of identity theft.
You closed an old credit account
Paying off a long-standing credit card debt can feel liberating – but closing the account might do more harm than good to your credit scores.
Both VantageScore and FICO factor in the length of your credit history when calculating your credit scores. And the longer the better. So, if you close one of the first accounts you opened when you began your credit journey, the average age of your credit history is shortened – causing your credit scores to drop.
Also, closing a credit card can affect your overall credit utilization because it lowers the amount of your available credit. The result is that the remaining balances on your open credit accounts will take up a larger amount of your available credit.
Here’s more information about when to close a credit card account and when not to:
You paid off your student or car loan
Credit bureaus typically treat both car and student loans as installment loans. Installment loans are loans with agreed-upon interest rates that you pay over time.
Knowing how installment loans work and successfully handling them reflects positively on your credit report. It shows lenders that you can effectively handle this type of credit in addition to other types, like revolving debt.
When you pay off your student or car loan, the installment loan might be eliminated as a “type” of credit you use. This can have a negative impact on your credit scores because it affects your “mix of credit”. The variety of types of credit accounts you carry, or your credit mix, makes up 10 percent of your overall credit scores. And variety is valued.
You recently applied for a new loan or credit card
Applying for new loans or credit cards are considered hard inquiries, which can cause your credit scores to drop. The effect of hard inquiries can add up quickly: Just one can shave five to 10 points off your credit scores.
However, if you happen to be mortgage or auto shopping within a certain time frame, most credit scoring models will count those multiple inquiries associated with “rate shopping” as a single credit inquiry.
Here’s some additional insight on how mortgage or auto inquiries might affect your score:
Changes in scoring formula or models
When a credit scoring model or formula changes, it will likely affect your overall credit scores.
For example, trending data is now taken into account by credit scoring models.
Someone who pays down their balances from month to month will likely have stronger scores than someone who is paying as agreed but is increasing credit balances each month.
If your credit scores take a hit because of a new scoring model, compare the new model to the previous model to see which areas you can work on.
Different scores for different reports
The three credit bureaus – TransUnion, Equifax and Experian – could all have different scores for each consumer. Lenders and creditors have a choice of which bureau(s) they report to – which can cause your scores to differ.
Here’s a scenario in which differing credit scores could hinder your ability to get loan approval – or trigger a higher interest rate if you do:
If you happen to have an account that you’ve paid late, that account might only be reported to Experian. However, you check your TransUnion score and are satisfied enough with the results to apply for a loan.
But the lender you’re applying with doesn’t pull from TransUnion. Instead, it pulls your score from Experian, which is a lower score.
The best way to find out which creditors are reporting to which bureaus is by getting your credit reports and credit scores from all three credit bureaus.
In short, scorecard hopping groups people together with similar risks. The models don’t reveal how they decide who goes on what scorecard.
Here’s how you might end up on a different scorecard:
If you consistently pay late, you might be put on a scorecard with others who also pay late. If you work on paying on time, however, you might be put on a scorecard with others who are working to improve their credit.
The bottom line: Scorecard hopping can affect your credit scores.
Note: Also, each lender uses different scorecards/models, so your scores may not be the same when different lenders pull them.
What You Can Do to Keep Your Credit Scores From Dropping
Paying on time, watching your credit utilization and applying for credit only when necessary can help you keep your credit scores from dropping. Also maintaining a good mix of credit and being selective when closing accounts can shield your credit scores from taking a hit.
What types of things do you do to maintain good credit scores? Let us know in the comments.