So you've been checking your credit score and it has dropped by a few points. While it can be worrisome, don't panic, there are lots of common reasons it may have fallen. The first step is understanding what might have happened so you can take steps to rebuild and make sure you don't make the same mistake again.
Here is a list of the six most common reasons your score may have decreased.
Have you made a big purchase recently? Your credit cards and the amount you put on them can have a substantial impact on your credit score. That is because 30% of your credit score depends on credit utilization, which is how much of your available credit that you’re using.
Our advice: Figure out the total amount of credit available to you. Divide your total balance by your total number of credit card limits. For example, if the balance is $500 and your credit limit is $1,000, then your credit utilization for that credit card is 50%. Credit scoring models favour a utilization rate under 30%, so be mindful.
Along the same lines, if your credit limit was lowered – then the total amount available to you has decreased. This means that the total amount of credit you’re using is relatively higher, which increases your credit utilization rate.
Technically, your bank can lower your limit without warning. This can bring you dangerously close to your credit limit, which as we know, can negatively impact your score.
Our advice: Call your bank and ask why your limit was lowered. If you can, try to pay off the balance as soon as possible.
Canceling or closing a credit card will most likely lower your credit score, even more so if you carry a balance on your card.
Even after you close your credit card, it will still be reported to the credit bureaus like Equifax or TransUnion as normal, but it will have a closed status. Your monthly payment history is still updated each month, as you make, or don’t make payments.
Our advice: Don’t cancel your credit card – hide it! We know it sounds a little odd, but it’s a better to keep the credit line open and remove the temptation as it also maintains your credit history.
If you've missed or made a payment late on a loan or credit card- it might have been reported to the major credit bureaus and have negatively impacted your score. Payment history makes up 35% of your credit score and can stay on your report for up to seven years.
Our advice: Make the payment as soon as possible. You can also try to call the lender or credit card company and request leniency.
Did you know that the number of credit inquiries you have on your credit report only makes up 10% of your credit score?
It’s also important to understand the difference between a hard and a soft credit check. If you’re applying for credit, such as a personal or a car loan, lenders will need to determine the amount of credit they are willing to provide. This is a 'hard check' and will negatively affect your score, but only slightly.
On the other hand, checking your Equifax credit through Borrowelll is a soft check and will not affect your credit score.
Our advice: Be mindful when checking your score through an institution and check it yourself when it makes sense. If you are looking at refinancing protect your score by making enquires within a short window.
Another reason your credit score may have fallen is that you missed a payment outside of your financial payments. These can include phone bills, Internet bills, or auto insurance payments.
If there was a mistake, you'll need to contact the credit bureau and report the error.
Our advice: Make your next payment as soon as possible to avoid any further negative consequences.
If you aren't already a member, sign up and check your free credit report. See updates to your score and report every week, and get personalized recommendations on how to improve your credit health. You can also access your credit files anytime and watch for errors or unusual activity which could indicate identity theft.
Editor's Note: First published Thursday, September 27th 2018.
Borrowell® is a registered trademark of Borrowell Inc. All Rights Reserved. The Equifax credit score is based on Equifax’s proprietary model and may not be the same score used by third parties to determine your credit profile. The score provided to you for educational use is the Equifax Risk Score.
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