Sometimes your credit score shocks you by dropping for seemingly no reason. This can be discouraging and frustrating if you can't pinpoint a cause. While Credit Karma doesn't calculate your credit scores, we can point out some of the factors that can affect your score, and you may be able to trace a drop in your score to one of these factors.
1. Credit Utilization
Carrying a significant amount of debt on your credit cards could be one reason why your score dropped. Your credit card utilization rate is a snapshot of how much credit you're using, calculated by dividing your total credit card balance by your total credit limit. If you're relying too much on credit, a lender could view that as a bad sign.
Possible Solution: If you have the means, you can try a couple of different approaches to paying down debt. For example, you could use the debt snowball method, where you pay down your small balances first to gain momentum and make your debt seem more manageable (while continuing to make minimum payments on your other debts).
You could also ask your card issuer for a credit limit increase on an existing account, although whether you get this is at your issuer's discretion. Alternatively, opening a new credit card would also increase your total available credit.
You can monitor your current utilization by connecting your financial accounts.
2. Payment History
Since creditors are trying to judge how likely you are to pay back your debt, reliability is important to them. If you miss even a single payment, your score could take a major hit, especially if you've never missed a payment before.
Possible Solution: Moving forward, see whether your credit card provider will allow you to set up automatic payments, or link your financial accounts and turn on bill reminders to help avoid missing future payments. Continue monitoring your credit report as well to ensure all of your payments are being reported as on-time.
3. Derogatory Marks
If you experienced a major drop in your credit score, a derogatory mark could be the culprit. Tax liens, accounts in collections and bankruptcies are among the most serious things that can happen to your credit score. Since they represent major delinquencies, they can reflect poorly on your ability to take care of your finances.
Possible Solution: Check your free credit reports with Credit Karma to investigate whether these derogatory marks actually belong on your report. If they don't, consider filing a dispute.
4. Average Age of Open Credit Lines
The longer you've had credit accounts open, the more creditworthy you generally appear to lenders. If you've closed an account recently, some scoring models won't factor in your closed account when determining your credit age, so your credit history may appear shortened and your score might drop. Opening a new account could also lower the average age of your accounts.
Possible Solution: Before opening or closing an account, use Credit Karma's Credit Simulator to see how the action could potentially affect your score, and be prepared for a change when you pay off a loan. If you're not sure if you should close an account, consider the pros and cons of doing so.
5. Total Accounts
While it's not the most important part of your credit score, having a good mix of different types of credit and an appropriate number of open accounts shows lenders that you have the experience to pay off debt responsibly. If you've just paid off the only loan you have, your credit mix might look a little less diverse to lenders. Similarly, if your total number of accounts suddenly skyrockets or nosedives, that could indicate that you're financially strapped and need credit or can't afford your existing credit accounts.
Possible Solution: Before you open or close any accounts, you may want to check your credit reports, where you can see the distribution of your open and closed accounts. Doing so will help you be aware of where you stand. If you're thinking about opening up new credit cards, don't fall for every offer out there - only open ones that you need.
6. Hard Credit Inquiries
Generally, when you apply for a new form of credit, whether it's a credit card, auto loan or mortgage, a hard inquiry is placed on your credit report. Normally, a single inquiry would initially only cause your score to drop a few points (if at all). However, if you've applied for several accounts in a short period of time, you could appear desperate for credit, and the damage from those hard inquiries might add up.
With that said, some scoring models (but not all) allow for rate shopping on auto or home loans without any additional damage.
Possible Solution: To avoid unnecessary inquiries, only apply for credit when you need (and can afford) it, and try to focus on cards that you have a good chance of getting approved for. Credit Karma shows you your estimated Approval Odds before you apply, so you can make a more informed decision.
If you're looking for a loan and need to rate shop, consider looking through consumer reviews to narrow down your choices. You can also consider getting pre-qualified or pre-approved for credit, so you have a better sense of what you'll be approved for before you apply. By doing your homework, you may be able to avoid unnecessary hard inquiries.
Building Your Credit Knowledge
Credit scores often seem like they're shrouded in a veil of mystery. Now that you know what might have brought down your credit score, try your best to keep an eye on your credit health. Even though these situations can't always be avoided, understanding their impact could help you make more informed decisions.
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