When was the last time you checked your credit score? If it has been a year (or even a few months!), it is definitely time for a quick check-in. To start, head on over to three of the main credit bureaus for a free credit check: Experian, TransUnion, and Equifax. You’re legally entitled to one free report from each credit agency per year, so now is the time to take advantage!
However, if you notice your score is not where you expected it might be, perhaps it’s a good time to take a step back and make a few adjustments. Below, we outline six of the most common reasons why your score may have changed or dropped as well as offer a few tips and tricks to help you get back on track. Let’s do this!
Reason #1: You missed a payment
Your payment history can account for nearly 35% of your overall credit score, so if you missed one or submitted a late payment (more than 29 days past due), you’ll see a fairly large impact to your score. Creditors see missed payments as causes for concern and will penalize your score accordingly.
*Our pro-tip? Set up automatic payments for the majority of your recurring expenses to ensure you don’t miss another payment going forward. Another tip? It can be difficult to remember when everything is due, so set up reminders for the other payments that you routinely have to account for or mark all due dates on a calendar that you keep handy. This way, you’ll always be aware of when your balances are due and you can stay on top of those payments accordingly.
Reason #2: You closed a credit card
Here’s a term to become familiar with: credit utilization ratio. This figure monitors how much of your overall credit balance you regularly use. If you find that you’re using too much of your available credit, then you’ll likely experience a score drop. On the other hand, if you close a credit card account, your available credit will also decrease and your score will drop with it.
*Our suggestion? Keep those old cards open if possible and stored in a place that won’t tempt you to use it! As long as you are not incurring any annual fees to have the card, it can pay to have those cards on hand to increase your available credit balance…even if you never use the card/credit!
Reason #3: You made a big purchase
If you recently made a big purchase, you’ll likely find that your credit score dropped as a result. It may seem strange, but now that you know the concept of credit utilization, this shouldn’t be surprising. Whenever you make a pricey purchase, your overall available credit goes down because your balance has increased. This inevitably impacts your credit utilization, though you should be in good standing as soon as you pay down your balance in a reasonable manner.
*Our tip? Try to keep to a budget in order to keep spending within reason. This way, you’ll regularly be able to pay down your balance each month which will win you bonus points with the credit agencies.
Reason #4: You applied for a new line of credit or new card
Anytime you apply for a new credit card, the result is a “hard inquiry” on your overall credit. Credit agencies complete this inquiry in order to assess your eligibility for a new card and to determine the rates associated with your new account. These hard inquiries will result in a small hit to your credit, but rest assured, these are temporary and should roll off within the year.
*Pro-tip: be thoughtful and strategic about when you open a new credit card. Opening cards too often will negatively impact your credit, and you’ll want to be mindful not to do so within a year of making a planned major purchase (such as a home or automobile). If you’re wise about if and when you open a new account, you’ll be able to go into making that planned purchase with as high of a score as possible.
Reason #5: You’ve just paid off a loan
No doubt, this reason seems completely counterintuitive. If you’ve just paid down a loan balance, you’d think your credit score would increase…right? While it certainly will increase over time, your credit score may temporarily reflect a decrease because your credit mix has changed. Your overall credit mix can account for up to 10% of your credit score, so while paying down your loan was a financially wise move, your credit mix has inevitably changed.
*Our suggestion? Try not to worry too much about this slight dip. Paying down a loan is a strong financial move and will certainly improve your financial situation in other ways (less paid in interest and other fees, for starters!).
Reason #6: There could be an error with your score
When it comes to all aspects of your financial life, it pays to be vigilant. These days, identify theft is fairly commonplace and unfortunately, can wreak havoc on your credit score if you don’t notice the issue in time. We recommend you monitor your credit report and accounts regularly. To keep track of your credit report, request a report from any of the three major credit bureaus (Equifax, TransUnion, and Experian) or simply request all three from www.annualcreditreport.com. Furthermore, scan your account statements regularly and take notice of seemingly small purchases. Often times, thieves will begin charging your card for small purchases (which can easily go unnoticed) before eventually using the card for larger purchases. Keep a watchful eye on all of your accounts and contact your credit card company or bank as soon as possible if you suspect any unusual activity.
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