It’s been awhile since you’ve checked your credit score. You take a look and discover that it’s dropped 20 points. So, what’s with the dip? And what can you do about it?
It’s a common scenario. After all, credit scores—which lenders use to determine how credit-worthy you are—can fluctuate from day to day and month to month. The key is educating yourself on the factors that hinder your credit rating and the steps you can take to improve your score. Here’s what you need to know.
Checking your credit score won’t harm it.
Almost one in five credit users believes the myth that checking their credit score can hurt it, as reported by a 2018 survey by Discover. Not true. Checking your credit is considered a “soft pull,” and won’t have an impact on your score. If you’ve applied for a loan and your credit gets checked, that’s a “hard pull” or inquiry and could have a temporary effect on your score.
Your credit score will vary across credit bureaus.
When you check your score (which you can do for free on sites like CreditKarma.com and CreditSesame.com as well as through some credit card companies), you’ll notice that your scores differ from site to site.
Different scoring models like FICO and VantageScore are used to determine the data in your credit reports at any of the three major credit bureaus: TransUnion, Equifax, and Experian. So, you could have a score of 767 on TransUnion on the same day Equifax says you have 797, a 30-point difference.
FICO, the scoring model used by most lenders, ranges from 300-850 and is based on the following factors: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%) and new credit (10%). It breaks down those scores by the following:
Exceptional: 800 to 850
Very good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 579 and under
So, what caused my credit score to drop?
There are a number of factors that play a part in your credit score taking a dive. Some possibilities include:
1. You had a late credit card payment. Late payments are the No. 1 reason a credit score can drop. FICO bases 35 percent of your credit score on your payment history and if you’re more than 30 days past due on a payment, credit issuers will report that delinquency to the credit bureaus. If you’re 60 to 90 days past due, your score will be affected even more. And if your account goes to a collections agency, well, you get the picture.
2. You made a big purchase. How much of your available credit that’s being used—also known as your credit utilization ratio—plays a big part in your FICO score. So if you’ve just spent $2,000 on a new computer, it will impact your score, at least temporarily. The day you pay your credit card bill your credit utilization ratio is at its lowest, and, unless you make more than one payment in a month, it’s at its highest at the end of the billing cycle before you pay your balance.
That doesn’t mean you shouldn’t make big purchases. Just be aware of those ebbs and flows based on your spending and do your best to pay down your balance as soon as you can.
3. You had a negative mark on your report. A negative event like a bankruptcy or foreclosure is considered a major delinquency and can cause your credit score to plummet. But it’s not a life sentence for your credit. As time passes, your credit score will be less affected. After seven years it will age off your credit report.
4. You closed a credit card account. You haven’t used that store credit card in years, so you decide to close your account. You’re not alone: According to a survey by Bankrate.com, credit card closures have doubled in the past five years.
But dropping that old account affects your credit score negatively since you’ve lowered the average age of your credit accounts. By keeping older credit cards open, you extend the length of your credit history, which represents 15 percent of your FICO score.
5. You applied for a new credit card. Requests for new credit account for 10 percent of your FICO score, so if you open multiple credit cards within a short time period, that can ding your overall credit score. That’s because whenever you apply for a new credit card, an inquiry—or hard pull—is added to your credit report. Be aware of not opening too many new credit cards for that reason.
6. You paid off a loan. You finally paid off your student loan. So, why should this influence your credit score? In the FICO algorithm, your credit mix factors 10 percent into your credit score. A mixture of accounts and types add to that diversity so no longer having that loan can skew your score temporarily.
7. There was an error or you were the victim of identity theft. Mistakes happen. The FTC reports that one in four consumers has identified credit report errors that could affect their credit score. That’s why it’s important to be vigilant about your credit score and pay attention to any major fluctuations. If something seems wrong, be sure to investigate it. You can get access to your credit reports once every 12 months from the three major credit card companies at AnnualCreditReport.com and can access your credit scores on a monthly basis by many credit-card companies.
And in a worse-case scenario, if you find out you’re the victim of identity theft, immediately report it to the Federal Trade Commission via IdentityTheft.gov. You’ll want to establish a fraud alert and freeze your credit so that your credit isn’t hit any further.
What key things can I do to improve my credit score?
Now that you know the major factors that can play a role in your credit score, focus on taking the following steps:
1. Pay your credit card bills on time. Life gets busy and it’s easy to lose track of your credit-card payment due dates. Make it easier on yourself. Set up automatic payments to avoid being late or missing payments so they won’t negatively impact your credit score.
2. Keep your credit-utilization ratio low. The lower your credit-card balance is in relation to your overall credit limit, the better. Experian recommends that your credit utilization ratio be less than 30 percent—meaning you’re using 30 percent or less of the total credit available to you at any given time—and you should aim for even lower if possible. Paying off your balance in full every month will help your credit score.
3. Monitor your credit accounts. Scan your credit statements to make sure there are no errors on your monthly bill. And if you do see something strange, contact your lender as soon as possible. Lenders and credit bureaus must make corrections within 30 days, but it can take up to 60 days to see changes reflected on your credit report.
Improving your credit score doesn’t happen overnight. It can take time. But by being aware of all the factors that can put a damper on your credit and making the necessary adjustments, you’ll get your score in better standing.