So you’ve checked your credit score and it went down….
There are many reasons why your credit score was lowered. Most of the time it’s because of something you did.
Below is a list of the most common reasons why your credit score was lowered. And I also detail what you can do to increase your credit score as well.
The nice thing about credit rating is that you can always work at it to increase it. A great credit score is incredibly important because it helps you get a low interest rate when you take out loans. A low interest rate will save you hundreds, if not thousands of dollars over the life of bigger and longer loan periods (like mortgages for example).
Check out the list.
1. You have too much debt on your credit cards
Credit utilization is a big factor in determining your credit score. What this means is that the MORE debt you have on your credit cards, the worse it is for your score. For example, if you have $30,000 in available credit across all your credit cards, and you’ve maxed out your credit limit at $30,000, that means your credit utilization is at 100% – which will lower your credit rating.
Contrastingly, if you’re credit limit was $30,000 and you have a balance of only $1,000, your credit utilization is very small, and your credit score will reflect that with a higher rating.
The simple solution to this problem is to lower your credit card debt by paying it off.
2. You’ve been missing credit card payments
All your credit cards have a payment history. When you miss a payment after 30 days, 60 days, 90 days, or more, it gets recorded with a rating. The longer you go before making a payment, the worse off you’ll be. For example, missing a payment after 1 month is better than missing a payment for 5 months.
If you happen to miss payments for many months in a row, it will lower your credit rating. To fix this, you simply need to make payments in full and on time. Over time, as your on time payments show up, it will reverse the negative impact of missing payments.
3. You’ve closed old credit cards
A lot of people aren’t aware that the age of a credit card is very important in your overall credit rating. The longer you’ve had an account open for the better, especially if you’ve been using the card. If you’ve happened to close a credit card that you’ve had for 10 years, this will likely lead to a drop in credit score. I recommend to not close old credit cards. If you don’t want to use it anymore, then simply don’t use it. Leaving the account open and unused is better for your credit rating.
4. You’ve recently requested hard credit checks
A hard credit check is when a loan company checks to see how much money they can give you and at what interest rate. This happens when you apply for a loan, like a car loan, or personal loan. The effects of a hard credit check are temporary. You may drop 5 points or so, however this drop in score is almost always temporary and your credit rating will go back up.
If you have too many hard credit checks in a short period of time, your credit score can drop a lot quickly. For example, if you go around to several financial institutions applying for loans. Again, this is generally a temporary drop in your credit rating and your score will go back up within the next few months usually.
5. You’ve been sent to collections
Collections is one of the worst thing that can appear in your credit history. You want to avoid this at all costs, even if you aren’t at fault and have improperly been sent to collections, you want to avoid this even if it means paying money out of your own pocket for something that you’re not at fault for. Because collections, even if it’s for a small amount of money, is awful for your credit rating. It can drop your score dramatically and also impact your interest rate when you apply for new credit. In fact, it can prevent you from getting a loan all together as some financial institutions won’t give you a loan if you have something in collections that hasn’t been cleared up.
6. Your credit limit was lowered
Sometimes credit card companies or banks will lower your credit limit, often because they deem you a little riskier and don’t want you to have as much credit available. This hurts your credit rating because the MORE credit you have available to you the better it is for your credit score. This goes back to credit utilization and it’s impact on your credit score.
For example, if you typically carry a balance of $1000 on your credit card, but you only have a $2000 limit, your credit utilization is 50%. That’s quite a bit. However, if your credit limit is $50,000, and you carry a balance of $1000, your credit utilization is only 2%, and that’s very small. You want to have a lot of credit available to you so your credit utilization is always small, whether you carry a balance of $1000 or $10000, the more available credit you have the better your credit score will be.
To increase available credit on your credit cards, call your credit card company and ask for a limit increase. In fact, you could do this every 6 months or so. They will usually ask you a few questions and then run it through the computer and tell you what they can increase it to. And it’s not a hard credit check which is good because it won’t affect your credit score. If they can offer you more credit, take it! It will increase your available credit and lower your credit utilization rate, which will help improve your credit score.