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Consumers who feel confident in the strength of their credit may be surprised if they see a sudden drop in their scores. While this could be a sign of identity theft (more on that in a minute), there are several other potential culprits if you’re seeing a drop in your credit scores. Consider the following financial behaviors to see if they could possibly be the cause of your lower credit scores.
When you apply for a credit card, mortgage or other loan, the lender pulls your credit, which results in a hard inquiry appearing on your report. One solitary hard inquiry is unlikely to drop your credit score more than a few points. But they add up, so if you’ve recently applied for several loans or credit cards, this could be causing the significant drop in your credit score.
You’ve budgeted, cut the fat, and finally got that credit card paid off in full — congratulations! But if you thought the next step was to close your credit card so you didn’t rack up more credit card debt, this could be why your scores dropped. Closing a credit card can cause your credit score to go down in two ways.
First, your credit score factors the age of your accounts and values older ones. If you close one of your oldest credit cards, the average age of your accounts drops and, in turn, causes your scores to go down.
Second, your credit utilization (how much debt you have in relation to your available credit) has a large impact on your credit scores (accounts for 30% of your scores, in fact). It is generally a good idea to keep your debt level lower than 30%, ideally 10%, to have the best effect on your scores. Closing a credit card will automatically lower the ceiling of your available credit, and any balances you do carry will take up a larger portion of your available credit. If your utilization is too high, your credit score can be negatively impacted.
Your payment history is the biggest influencer of your credit scores, accounting for 35% of the scores. Even a single missed payment can cause a hit to to your credit scores. These missed payment dings can stay on your credit report for seven years, so they can do lasting damage, especially if you forget about the payment all together and it goes to collections, which brings us to our next point…
If you’ve left a credit account unpaid for too long, your lender or issuer may send it to collections. Having a collection account appear on your credit reports will be damaging to your scores. They indicate serious delinquencies and tell creditors that you might be a risky bet.
Inaccurate information on your credit report can come in many forms. Accounts you don’t own, payments you didn’t miss and inquiries you never initiated can all land on your credit report as a result of a clerical error of some variety. But if it’s on your credit report, it could be dragging your scores down. Immediately disputing this information is crucial to maintaining your credit score. (You can learn more about how to dispute errors on your credit reports here.)
As we mentioned earlier, a sudden drop in your credit scores can be a sign of fraud. Frequently reviewing your credit can be a great way to help you monitor this. (You can see two of your credit scores for free, updated every 14 days, on Credit.com.) If you think you’re a victim of identity theft, this guide can help you figure out what to do next.
You have several different scores, all of which may be just a bit different, as not every issuer or lender reports to every bureau. If your credit score appears to have dropped, make sure you’re comparing the score from the same place, as this could be why you’re seeing a difference.
The three major credit bureaus – Experian, Equifax and TransUnion – all maintain different versions of your credit report, and you can get copies of these for free every 12 months by visiting AnnualCreditReport.com. Remember: Lenders and creditors don’t always report information to all three bureaus, and the bureaus don’t share information, so you’ll want to review each of them for discrepancies or errors.
Do you know your credit score?
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