Have you seen your credit score lately and got alarmed by its sudden drop? Well, credit scores do fluctuate all the time. Based on your payment history or new expenses, your average credit score may witness a minor 20 to 30 point fluctuation every month even if everything is stable on your financial front.
With that being said, a sudden drop of 100 points or so could be worrisome for anyone. In this case, you do need to know why your score has dropped suddenly so that you can make the necessary fixes.
Since credit score calculation is a complex process, it is often difficult to pinpoint the exact reason for the drop. Even those with the highest credit score cannot often justify the reason behind this. However, it is not impossible to trace a sudden drop. We are not going to discuss the obvious ones like late payment of loans, missed credit card payments, etc.
Instead, what we are going to see here is a list of unusual reasons why your credit score could have been negatively impacted. This applies to all major credit agencies in the market — TransUnion credit score, fico credit score, Experian credit score, etc. Read carefully, because some of this might surprise you.
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1. You’ve purchased something expensive
When you purchase something expensive, it means that your credit utilization has increased. Since credit utilization contributes to nearly 30% of your credit score, you might witness a sudden drop. This one actually has nothing to do with your purchasing power or your ability to pay back the credit.
Just remember that this is only a temporary drop. As you start paying your installments or pay the whole credit balance, your credit score will turn back to normal.
The solution: If you don’t want to see a drop at all, then the best practice would be to keep your credit utilization under 30%. For instance, if your credit card has a maximum limit of $25,000, an outstanding balance of $2,500 indicates a credit utilization of 10%. In this case, you need to keep your balances under $7,500 to not witness a drop.
2. You’ve applied for a new credit card or a loan
The more lines of credit you open up, the more your risk factor increases to lenders. Let’s say that you have recently opened a couple of credit cards and applied for a new loan. This is likely to increase your overall monthly outstanding and your credit score is bound to decline.
What you might find surprising is that even multiple inquiries about credit cards and loans are enough to bring down your score. When you make multiple inquiries, you might come across as “credit hungry” and this will hurt your average credit score.
The solution: Check your credit score before you apply for a loan or a credit card. Do not make the mistake of applying for multiple lines of credit at the same time. If your application gets rejected, check your credit score first, look for ways to improve it, and then apply for a loan or credit card.
3. You’ve closed a credit card account
You have an unused credit card account lying inactive for a long time, and you decide to close it. Boom! Your credit score gets lowered by a few points. This once again concerns your credit utilization ratio. By closing a credit card account, you are lowering your available credit.
For instance, if you had two credit cards with a $10,000 balance on each, your original credit utilization before you purchase anything is $20,000 or 100%. By closing one account, you are bringing it down to $10,000 or 50% and this will have some impact on your average credit score.
The solution: Unless there is a big annual fee, the best idea would be to have the credit card account open without making any purchases on it. In this way, your credit utilization remains the same and your credit scores will not be affected.
4. You’ve paid off a loan early
Yes, you read that right. Even paying off a loan early can bring down your credit score. This happens mainly because your credit mix will witness a change as you pay off a loan. A good mix of credit card balance, loans, mortgages, etc., is good for your average credit score. You don’t have to worry about this as it is only temporary.
As far as credit bureaus are concerned, your credit score will be better the longer your credit account is open. If you are consistent with your monthly installments, your credit score will be in good shape. Sudden payment of long-standing accounts will affect this mix and bring down your credit score.
The solution: This is not an issue that needs a solution. Obviously, I am not going to recommend you to stop paying your loan just to maintain your credit score. Remember, this is only a temporary setback. Over time, your spending pattern will indicate your strong financial position and your credit score will naturally boost back.
5. You’re paying your credit card bills at the wrong time
So, you are paying your credit card bills on the due date each month to avoid paying expensive interest fees. Well, it is certainly a good thing. Except, your credit score is not going to change immediately after you have paid your bills. Credit bureaus update user accounts just once a month.
When your card statement is generated, it gets sent to the credit bureaus and the score you see is based on that. If you have a large chunk of credit at the time of your statement, it will be included in your credit score till the next month your score is updated.
The solution: You can pay off a large part of your credit card debt a little earlier than your statement date. This way, the amount you paid off will not be considered when determining your credit score. Even if you cannot pay off the full amount, make sure that the outstanding utilization is not more than 30% at the time of your credit card statement.
6. You might be a victim of identity theft
Well, we have come to the scary part of this discussion. Yes, identity theft is certainly a possibility and it could happen to just about anyone. Someone might have opened a credit card or a loan using your identity and enjoying the benefits of it.
A lot of times, these incidents go unnoticed. If you are someone who actively tracks the credit score regularly, you can catch this early and mitigate the damages. Even if you are a victim of identity theft, don’t go into a full-on panic mode. There are ways to reverse the damages.
The solution: Once identity theft is confirmed, place a fraud alert with one of the credit bureaus first. You may also have to notify the FTC (or any other concerning government body in your country). This should discourage identity thieves. However, if you are still being victimized, consider freezing your credit for a while. This will stop any further damages to your identity.
When people think about bad credit, they always think about bad financial habits. However, some unusual reasons do exist and may put your perfect credit score in jeopardy. Remember, not to get overworked for every small drop in your score as it is bound to happen no matter what.
All you need to do is follow proper financial hygiene and keep checking your credit score once in a while. If you are suffering from bad credit scores, you may have to take some extra measures to boost your credit back. Luckily, there are many services available to get your credit back on track. Want to find out how? Click the link below.