Why Did My Credit Score Drop?
You know your credit score is important. Maybe you have known that for a long time, or maybe you learned it while reading an informative article on the OppLoans Blog.
Regardless, even if you know the importance of your credit score for obtaining things like personal loans; credit cards; an apartment; and in some cases, a job; do you know what tends to make it drop?
Missing bills or misusing credit are not the only mishaps that will ding your credit score. There are unexpected factors that can cause your credit score to drop, as you likely surmised from the title of this article. Here are five of them.
No. 1: Closing a card or account
Variety is the spice of life. It also helps when it comes to your credit score.
“Credit cards, bank loans, and mortgages can all add diversity to your credit,” said Logan Allec, CPA, owner of personal finance website Money Done Right. “If you have all of your credit concentrated on one credit card, however, you can hurt your credit. To avoid this impact, make sure to diversify your credit with at least multiple credit cards.” Of course, if you are going to have more than one credit card, make sure you are able to pay off your balances each month to avoid accruing more debt, falling into a debt spiral, and negatively impacting your credit score.
With this in mind, you need to be careful about closing credit cards and may be better off keeping a card open, even if you are not using it at all. In this case, this can positively help to diversify your credit.
We also previously covered the ways in which paying off a loan can cause a small, often temporary drop in your credit score. Student loans are particularly susceptible to this, as it is often one of the oldest accounts an adult may have.
So does that mean you shouldn’t pay off your loans completely and should never close any credit cards? Of course not! It just means you should be prepared for a possible credit drop and keep an eye on your score so you are not caught by surprise if you undergo a credit check soon afterwards.
No. 2: Identity theft
These days, it feels like there is a new massive hack or data breach every other week. If your information has been stolen, you could find yourself facing credit drops you were not expecting.
“Identity theft is one reason your credit score may suddenly drop,” said Justin Lavelle, chief communications officer for BeenVerified.com. “One way this can happen is via a data breach involving a company’s customer’s records being accessed in a fraudulent manner. These records often include the customer’s name, social security number, date of birth, home address, and driver’s license number.”
Lavelle explained how once a thief has access to this information, they can make as many purchases as they want or attempt to take out credit in your name. As you might imagine, this can tank your credit score before you even realize it has happened.
“Once you have been the victim of credit fraud, an extended fraud alert – lasting seven years – may be placed on your account until you authorize that it be lifted,” Lavelle said. Once this is in place, lenders must take additional steps in verifying your identity.
“If you suspect that you’ve been the victim of credit fraud, you can request an initial fraud alert be placed on your credit score for 90 days. This way, lenders must notify you when any new credit inquiries are made using your personal information. It also gives you the option to permanently remove your name from prescreened offers for 5 years.”
There is only so much you can do to prevent someone from stealing your identity, so it is important to pay close attention to your credit report and finances.
No. 3: Foreclosure
When it comes to finances, unfortunately, the poor often get poorer and one financial setback can leave you further behind. It certainly is not fair, but you should be wary of it, especially if you are in dire straits with your finances.
“Foreclosure can have many negative ramifications within your life, including hurting your credit score,” Allec said. “A lost home can lead to the ratings agencies deciding you are more of a credit risk and a corresponding drop in your score. However, many people didn’t realize this in 2008/2009 when housing prices were impacted. It was only after the housing market recovered that millions of Americans learned their credit had been negatively impacted.”
To avoid the risk of foreclosure, Allec suggested avoiding mortgages you will not be able to easily handle. For example, consider avoiding mortgages that require balloon payments and see if renting might make the most sense at the moment.
No. 4: Credit checks
You will likely need to undergo a credit check at some point, whether it is for a loan, credit card, or any number of other things. If you are subjected to a soft credit check, it will not affect your credit report and you may not even be aware it happened.
Hard credit checks, on the other hand, require your permission, so you should know that you will have a brief and small credit dip before you accept. As long as you are prepared, you should be able to manage it.
No. 5: Credit bureau mistakes
Finally, there are times when your credit can drop because the bureaus simply make a mistake.
“Did you know that the rating agencies often make mistakes when recording people’s credit?” Allec asked. “One company, Equifax, was hacked and exposed millions of people’s data. Other agencies have been documented to make mistakes where they routinely confuse different people and negatively lower the wrong person’s credit score.”
Allec recommends taking advantage of a free yearly credit report to check for any anomalies and ensure a bureau error doesn’t negatively affect you.
Getting ahead of the curve
Your credit will go up and down throughout the course of your financial life. As long as you know what causes those fluctuations to happen, you can work to make the ups more common than the downs.
Logan Allec is a CPA and owner of the personal finance website Money Done Right. After spending his twenties grinding it out in the corporate world and paying off more than $35,000 in student loans, he dropped everything, and in 2017, launched Money Done Right. His mission is to help everybody—from college students to retirees—make, save, and invest more money. He resides in the Los Angeles area with his wife Caroline. Follow him on Twitter @moneydoneright.
Justin Lavelle is chief communications officer for BeenVerified.com and a leading expert on identity theft and scams. BeenVerified is a leading source of online background checks and contact information. It allows individuals to find more information about people, including phone numbers, email addresses, property records, marital status, and criminal records in a way that’s fast, easy, and affordable. Follow him @BeenVerified.