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00:03 hello everyone it’s me your friend Lora 00:06 Adams in your ears again with a never 00:09 equal episode of the money girl podcast 00:11 if you’re new to the show I am so glad 00:14 to have you here I’m a personal finance 00:16 author speaker spokesperson and consumer 00:19 advocate and if you’re a longtime 00:21 listener which I know many of you are 00:23 thank you so much for being a part of 00:25 this community I’ve been writing and 00:27 hosting this show since 2008 and I love 00:30 connecting with you the mission for the 00:33 show is to give you the knowledge 00:34 resources and motivation to manage your 00:37 money the best ways possible and create 00:40 a richer life and today’s show is for 00:43 you if you are concerned about a recent 00:46 drop in your credit score or maybe you 00:49 just simply want to make sure that your 00:50 credit keeps on moving up and never goes 00:54 back down and even if you think that 00:56 your credit is not a major priority in 00:58 your life maybe you’re thinking well 01:00 Laura I’m not in the market for a home 01:02 or a big purchase like a car and I don’t 01:06 want a new credit card etc I want you to 01:09 understand that maintaining great credit 01:11 is still a critical part of your overall 01:13 financial health it affects so many 01:15 aspects of your finances even if you 01:18 don’t plan on borrowing any money it’s 01:20 going to affect the rates that you pay 01:22 for certain types of insurance it 01:24 affects the offers that you get for 01:26 things like wireless phone plans the 01:29 ability to rent a home or apartment in 01:32 many cases hinges on your credit and 01:34 even your ability to get a job with an 01:37 employer who may review your credit as 01:39 part of their screening process and 01:41 there are more things in our life that 01:43 credit effects but those are the main 01:45 ones that a lot of people are surprised 01:47 about and today’s podcast was inspired 01:50 by a question from Michelle bee from 01:53 Orlando who says I normally don’t worry 01:56 much about my credit score and I don’t 01:58 need to use it for anything right now 02:00 but my FICO score for June was 785 and 02:05 now for July its 747 I didn’t do 02:09 anything different that I can recall I 02:11 don’t have a mortgage or any debt 02:13 I’m never late on bills I reviewed my 02:16 credit reports in the past six months 02:17 and didn’t see any red flags on them can 02:21 you help me understand why this drastic 02:24 change occurred and if I should be 02:26 worried about something like identity 02:27 theft Michelle thank you for this 02:30 question and for previous questions that 02:32 you’ve sent in I know that seeing your 02:35 credit score drops suddenly and for no 02:37 apparent reason really can be 02:39 frustrating and a little confusing as 02:41 well in this podcast I’m gonna explain 02:44 why scores fluctuate and when you should 02:47 be worried about a drop I’m also going 02:50 to cover tips to boost your scores 02:51 quickly so an unexpected credit score 02:54 dip doesn’t hurt your finances you’ll 02:57 find the notes for this and every show 02:59 with links to resources that I mentioned 03:01 plus the full archive of podcasts over 03:04 in the money girls section at quick and 03:07 dirty tips com this is episode number 03:10 599 called eight reasons your credit 03:14 score dropped and what to do it’s 03:16 supported by Griffin home Griffins 03:19 comfortable sheets and duvets are made 03:21 with premium quality supima cotton so 03:24 you can enjoy the most comfortable sleep 03:26 of your life for a limited time you can 03:28 try the sheets free for 30 days no 03:31 strings attached if you don’t like them 03:33 just send them back and you won’t be 03:35 charged visit Griffin home comm or 03:39 search for Griffin home and use the code 03:41 money girl at checkout it’s spelled gry 03:45 pH o n home comm and use the code money 03:50 girl alright so let’s talk about credit 03:53 I think one of the biggest 03:54 misconceptions about credit is that you 03:57 only have one credit score like FICO a 04:00 lot of us have heard of FICO so you may 04:02 just think well that’s what a credit 04:04 score is and while FICO is a very 04:07 popular type of score there are actually 04:10 hundreds of different credit scoring 04:12 models that are used by mortgage lenders 04:15 credit card issuers insurers and you 04:18 know a variety of other merchants there 04:20 are even multiple types and versions of 04:22 FICO scores and each scoring model is a 04:26 little different 04:27 all use a pretty complicated algorithm 04:30 to evaluate you based on the information 04:32 in your credit reports and those reports 04:34 are at the nationwide credit bureaus 04:37 Equifax Experian and TransUnion and of 04:41 course the higher your score the less 04:43 risky you appear to potential creditors 04:45 and merchants so let me give you some of 04:48 the most popular scores and the ranges 04:51 so just so you have an idea of what I’m 04:53 talking about 04:54 for the FICO mortgage score that ranges 04:57 from 300 to 850 04:59 but the FICO auto score ranges from 250 05:03 to 900 the FICO bankcard score ranges 05:06 from 250 to 900 and the Vantage score 05:09 ranges from 501 to 990 and then there’s 05:13 the TransUnion score that ranges from 05:15 300 to 850 so you can see they’re all 05:18 slightly different and in addition to 05:20 having different score ranges each 05:22 scoring model puts emphasis on different 05:25 factors for instance let’s say you 05:27 missed a payment on an auto loan well 05:30 that might be weighed more heavily when 05:32 factored into an auto scoring model if 05:35 you’re going for an auto loan then it 05:38 would be factored into a different 05:40 scoring model and the exact formula that 05:42 a credit scoring company uses is kept 05:45 confidential 05:46 however FICO is pretty transparent and 05:48 they say that they use the following 05:50 factors and weights as a baseline the 05:54 most important factor that FICO uses is 05:56 your payment history they say this makes 05:59 up 35 percent of a FICO score payment 06:03 history is things like any late payments 06:05 accounts and collections in any 06:07 bankruptcies these affect your score the 06:10 most so making payments on time is a 06:13 critical critical factor for maintaining 06:16 good credit 06:17 FICO says the second most important 06:19 factor is amounts that you owe and 06:21 that’s 30 percent this is also known as 06:24 credit utilization it’s the amount of 06:26 debt that you have compared to your 06:29 available credit limit and they also 06:30 look at just the total amount of debt 06:32 that you have as a number and using a 06:35 smaller percentage of your available 06:37 credit will always boost your score 06:41 they also look at age of your credit 06:43 history that’s 15% of your FICO score 06:45 this is how long you’ve had credit 06:48 accounts open in your name having older 06:51 accounts improves your score they also 06:53 evaluate your new credit inquiries 06:56 that’s ten percent of your score this is 06:58 any applications that you may make for 07:01 new credit accounts like a new credit 07:03 card or a new loan that will temporarily 07:06 lower your score and lastly the mix of 07:09 credit types is 10% this is the variety 07:12 of credit accounts in your name such as 07:14 credit cards auto loans and mortgages 07:16 having a mix of credit types actually 07:19 helps improve your score additionally 07:22 the data used by a credit model varies 07:25 depending on where it comes from the 07:28 credit bureaus may all have slightly 07:30 different information about you so 07:33 that’s why if you get a score from let’s 07:34 say Experian and you get one from 07:36 TransUnion and not only might it be 07:38 different because these score ranges are 07:40 different but it can be different 07:42 because they have slightly different 07:44 information about you and that’s because 07:45 creditors may only report your payment 07:48 information to one or two of the credit 07:51 bureaus instead of all three of them so 07:53 your information may not match 100% from 07:57 credit bureau to credit bureau the 07:59 bottom line is that a credit score is 08:01 going to depend on which scoring model 08:04 is used and which credit bureau is used 08:06 since there’s so much variation and 08:09 credit scores doing an apples to apples 08:12 comparison and looking for trends is 08:14 really what’s most valuable to us as 08:16 consumers your actual score the number 08:19 really isn’t as important as making sure 08:22 that your FICO or your vantage score is 08:24 moving up over time or at least holding 08:27 steady over time well it’s not unusual 08:30 for credit scores to fluctuate a few 08:32 points from month to month a larger drop 08:35 of 20 points or more may indicate a 08:38 problem that should be investigated 08:39 right away since Michelle doesn’t have 08:43 any late payments or changes with her 08:45 accounts why is her credit score dropped 08:47 38 points well we’re going to review 08:50 eight reasons for a sudden score drop 08:53 and 08:54 you and Michelle should do about it 08:56 alright the first reason is you’ve 08:59 become the victim of identity theft 09:02 this is by far the worst and most 09:04 serious reason you could see your credit 09:07 scores plummet if a thief steals your 09:09 personal information and takes out a 09:12 loan or gets a credit card in your name 09:14 he or she is not likely to pay the bill 09:16 now I’m not saying that that’s what has 09:18 happened with Michelle she did let me 09:20 know that she reviewed her credit 09:22 reports and everything looks ok so we’ll 09:25 talk more about what could be going on 09:26 with Michelle since payment history is a 09:29 top factor in how credit scores are 09:31 calculated even one missed payment will 09:34 cause your scores to instantly drop so 09:37 definitely review your credit reports 09:39 for any suspicious activity like 09:41 accounts that are not yours or higher 09:44 than normal balances on existing 09:46 accounts and if nothing is amiss your 09:49 score drop must be due to something else 09:52 and as I mentioned that’s got to be the 09:54 case with Michelle but if you have 09:57 become the victim of identity theft 09:59 you’ve got to act quickly to make sure 10:02 that you minimize the damage you want to 10:04 contact any creditor listed on your 10:06 credit report that you don’t recognize 10:07 and ask to speak with their fraud 10:09 Department then place a fraud alert on 10:12 your credit reports with the credit 10:14 bureaus so that no new accounts can be 10:16 opened in your name you also want to 10:18 file disputes with each of the credit 10:20 bureaus where the fraudulent information 10:22 appears and file a police report so that 10:26 you’ve got proof that a crime was 10:28 committed against you a cyber criminal 10:32 can use your personal information to 10:34 make purchases on your existing credit 10:36 card accounts they can even drain your 10:39 checking or your savings accounts so 10:41 definitely change the passwords on all 10:43 of your online financial accounts to 10:45 prevent any future theft remember that 10:48 the best way to protect your credit and 10:50 your identity is to regularly check your 10:53 credit reports for unauthorized activity 10:56 in a lot of cases that’s your first sign 10:57 that something bad is happening it’s 11:00 easier than ever to stay on top of your 11:01 credit you can use annual credit 11:04 report.com that’s the site where you can 11:06 get in 11:07 newel free copy of each of your reports 11:10 or you can sign up for free access more 11:13 frequently in a lot of cases there are 11:15 sites that will give it to you monthly 11:17 or even with unlimited access at a 11:20 variety of free credit sites and I’ll 11:22 list some in the notes for the show in 11:24 the money girls section at quick and 11:26 dirty tips.com 11:26 alright let’s move on to the second 11:29 reason why your scores may have dropped 11:31 you may have an error in your credit 11:34 reports so as you review your credit 11:37 reports looking for evidence of fraud 11:38 you may find other errors that are to 11:41 blame for a sudden drop in your credit 11:43 scores for instance there could be 11:45 inaccurate late payments account 11:47 balances that are incorrect or your 11:50 available credit limits may be wrong and 11:53 may be dragging down your scores without 11:54 you knowing it so if you see anything 11:57 that is not right definitely file a 11:59 dispute with each of the credit bureaus 12:01 that shows that in accurate information 12:03 and remember as I mentioned it may not 12:06 be across all three of the bureaus so 12:08 you’ll want to check all three and then 12:10 file a report or file a dispute where 12:12 needed 12:13 then contact the creditor that reported 12:16 the error and ask them to correct the 12:18 data with the credit bureaus be prepared 12:21 to send any documentation you have that 12:23 will help you prove a creditors error 12:25 and it may take a month or two before an 12:27 error gets researched and updated so 12:30 just keep checking your credit reports 12:31 to make sure that the problem does get 12:33 resolved and that your scores will go 12:36 back up 12:37 reason number three that your scores may 12:40 have dropped is you unintentionally 12:42 missed a payment due date as I 12:45 previously mentioned how you pay bills 12:47 is the single most important factor that 12:50 a credit scoring model uses to calculate 12:52 your scores I call payment history the 12:55 king of credit because it makes a the 12:58 largest percentage of a typical credit 13:00 score when you have a record of paying 13:02 accounts on time it shows that you’ve 13:04 been responsible with money it suggests 13:06 that your good behavior is going to 13:08 continue and that you’re not going to 13:10 default on debt in the future likewise 13:12 having late payments or accounts and 13:14 collections are very serious red flags 13:17 that you have not been dependable and 13:19 that you may not read 13:21 pay debts with any regularity or at all 13:23 but that’s why the consequences are 13:25 pretty stiff when you have a late 13:26 payment even making just one late 13:29 payment can drastically reduce your 13:31 scores and this is especially true if 13:33 you have good or excellent credit you’ll 13:36 see a pretty steep drop in your scores 13:39 but let’s say you did pay on time and 13:42 there’s just an error there well if you 13:44 check your reports and you are surprised 13:46 to see a late payment you’ve got to act 13:49 quickly to settle your account maybe 13:51 your payment got lost in the mail or 13:52 damaged in the mail or there was a 13:54 glitch with your online bill pay service 13:56 try to figure out what’s going on and 13:59 just make sure that you can prove to a 14:00 creditor that you did pay on time and if 14:03 you can do that they may be willing to 14:05 cut you some slack especially if you’ve 14:07 been a good customer just pay your bill 14:09 as quickly as possible and request that 14:11 the late payment with the credit bureaus 14:13 be reversed also note that a late 14:17 payment can’t be reported to the 14:19 nationwide credit bureaus until your 30 14:21 days past due so what that means is if 14:24 you miss a payment due date by just a 14:25 few days or even a week and you quickly 14:27 get caught up your mistake won’t show up 14:30 on your credit reports all right let’s 14:32 take a short break to thank the amazing 14:35 sponsors who help keep money girl going 14:37 for you week after week and then we’ll 14:39 cover the remaining five reasons why you 14:42 may have seen a credit score drop 14:44 today’s episode is supported by light 14:47 stream if you’re ready to pay off your 14:49 credit 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discount terms and conditions apply and 15:53 offers are subject to change without 15:54 notice 15:55 visit light stream comm slash money girl 15:58 for more information 15:59 today’s episode is also supported by the 16:02 employee benefits company unum while 16:06 many of us are daydreaming about summer 16:08 vacations now is also a great time for a 16:11 mid-year financial checkup according to 16:14 a recent study by employee benefits 16:16 company unum nearly half of US adults 16:19 have less than $1,000 in savings and 16:22 about the same number could only pay 16:24 their bills for less than two months if 16:26 they lost their main source of income 16:28 forty-nine percent also said they 16:30 experienced anxiety about their finances 16:32 in the past year unum wants you to ask 16:35 yourself some questions about your 16:38 financial plan like are you on track for 16:40 your savings goals have you changed jobs 16:42 gotten married or had a child during the 16:45 first half of the 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quickly 17:48 robbed and what may surprise you about 17:50 credit utilization is that it can 17:52 increase even if you haven’t been maxing 17:55 out your credit cards for instance if 17:57 your card issuer cuts your available 18:00 credit limit your utilization ratio 18:03 would go up why well you’d have the same 18:07 outstanding balance compared to a 18:09 smaller credit line and that makes you 18:12 appear less favorable to credit scoring 18:14 models card issuers set your spending 18:17 limit when you first open an account but 18:20 they can increase or decrease it 18:23 according to the terms of your agreement 18:24 if an issuer see signs of risk such as 18:28 large cash advances or a card that 18:31 hasn’t been used for an extended period 18:33 they can take action to protect 18:35 themselves by reducing your credit limit 18:38 or even closing your account altogether 18:40 so if you’ve had a credit line cut or 18:44 cancelled review your credit report for 18:46 any inaccurate information that might 18:49 have been a concern to your creditor 18:51 then dispute any errors on your credit 18:53 reports and contact the creditor to 18:56 discuss raising your credit limit that 18:59 will reduce your utilization ratio and 19:01 help boost your scores reason number 19:04 five your scores may have dropped is you 19:07 have no credit utilization well having 19:11 low credit utilization on revolving 19:13 accounts is one of the best ways to 19:15 build and maintain great credit 19:18 you can’t go overboard by going down to 19:21 zero utilization you’ve got to have 19:24 credit accounts and use them responsibly 19:26 in order to have enough data to even 19:28 generate a credit score but don’t get me 19:30 wrong it is not necessary to carry debt 19:33 from month to month or to pay any 19:35 interest in order to build credit you 19:37 simply must have open accounts that show 19:40 some activity such as making small 19:43 charges from time to time that you pay 19:45 off in full that’s a smart strategy that 19:49 doesn’t cost anything and allows you to 19:51 build great credit over time number six 19:54 your average age of credit decreased I 19:58 mentioned that the age of your credit 20:00 accounts is a relatively small 20:02 during your credit scores credit models 20:04 figure the total months that all of your 20:07 accounts have been open and divided by 20:09 the number of accounts you have to come 20:11 up with an average having a long average 20:15 credit history helps lenders know if 20:17 you’re likely to be financially 20:18 responsible in the future and are a good 20:21 credit risk so the longer that you’ve 20:23 had credit accounts open in your name 20:26 the better once a credit account is 20:29 closed or paid off your average age of 20:32 accounts begins to decrease if you close 20:35 a really old account let’s say you’ve 20:37 had a credit card in your name for 20:38 decades and you close it that will have 20:41 a more negative effect on your credit 20:43 scores then if you closed a relatively 20:45 young account maybe something you only 20:47 had open for a few months or a year also 20:50 when you open a new account you 20:53 immediately reduce the average age of 20:55 your accounts which may cause a drop in 20:58 your credit scores to make sure your 21:00 average age of credit accounts grow 21:02 slowly over time only open new accounts 21:05 when it’s absolutely necessary and make 21:07 sure to keep your oldest accounts open 21:10 and active many people mistakenly 21:12 believe that they should immediately 21:14 close a credit card after paying it off 21:16 well that typically is not a great idea 21:19 a better option is to leave a paid off 21:22 card open and use it once in awhile for 21:25 a small charge that you pay off in full 21:26 that allows you to leverage its positive 21:29 payment history its longevity and the 21:32 available credit limit to raise your 21:34 credit scores all right the seventh 21:37 reason your scores may have dropped your 21:39 credit mix has changed while it’s not 21:42 the most important factor in how your 21:44 credit scores are calculated having a 21:46 mix of different types of accounts helps 21:48 increase your scores for instance having 21:51 revolving accounts such as a credit card 21:53 or a line of credit in addition to 21:55 installment accounts such as a car loan 21:58 or a mortgage shows lenders that you can 22:00 handle different types of credit 22:01 responsibly so if you just paid off the 22:05 only installment loan you have your 22:07 credit mix looks less diverse to lenders 22:10 and you know there’s not much that you 22:13 can do about that 22:14 you need to finance a purchase like a 22:16 home or a car I don’t recommend taking a 22:19 loan just for the sake of boosting your 22:21 credit I do recommend having credit 22:23 cards open in your name but you don’t 22:24 necessarily want to take out a loan just 22:27 to boost your credit if you maintain 22:29 good habits like paying credit cards and 22:32 utility bills on time and maintaining 22:35 those low utilization rates your credit 22:37 score’s will naturally go up over time 22:39 as is often the case you’re going to get 22:42 the best scores by using credit as long 22:45 as you’re using it wisely and 22:46 responsibly and by the way if you want 22:49 to learn a lot more about taking control 22:51 of your credit and pursuing your 22:53 financial dreams I wouldn’t encourage 22:55 you to check out my online class we go 22:57 way in-depth into this topic the class 23:00 is called build better credit the 23:02 ultimate credit score repair guide it 23:04 teaches all aspects of building credit 23:06 from scratch how to prepare for a major 23:09 purchase in dealing with creditors 23:11 wisely I’ll tell you a little bit more 23:12 about it at the end of the show and our 23:15 last reason number eight 23:18 you made a large purchase on credit 23:20 making a large credit card charge is one 23:24 of the most common reasons for an 23:25 unexpected credit score drop you might 23:28 think that it doesn’t matter as long as 23:30 you pay your credit card bill in full by 23:32 your statement due date now that’s 23:33 definitely what I recommend doing 23:36 problem is your credit card company may 23:39 report your balance to the credit 23:41 bureaus before your payment is received 23:42 in other words paying off your entire 23:45 credit card balance every month 23:47 generally does not improve your 23:49 utilization ratio so this is why you 23:52 never want to exceed about 20 percent of 23:55 your available credit limit on an 23:58 individual card the bottom line is that 24:00 if you use more of your available credit 24:02 it’s a mathematical signal that you 24:05 might make late payments in the future 24:07 and are a higher credit risk so in order 24:11 to keep your utilization ratio low and 24:14 boost your scores never charge more than 24:16 20% of your available credit limit on 24:19 any one card or on a total of all of 24:23 your cards you can help this by 24:25 requesting a credit limit increase 24:28 one or more of your credit cards that’ll 24:30 give you a little bit more room another 24:32 tip is to open an additional credit card 24:34 and spread out charges on multiple cards 24:37 instead of maxing out one card and 24:40 finally you can make multiple payments 24:43 during the month to increase the 24:44 likelihood that a lower balance will get 24:47 reported to the credit bureaus okay now 24:50 that you understand eight common reasons 24:53 why credit scores can take a dive let’s 24:56 get back to michelle situation she said 24:58 that her credit reports look good within 25:00 the past six months now i’m not really 25:03 sure what that means if she hasn’t 25:05 reviewed them i would say within the 25:07 past month she should but let’s assume 25:09 that she is not the victim of identity 25:12 theft 25:13 that she doesn’t have any errors on her 25:15 reports and she didn’t make a late 25:16 payment michelle mentioned having no 25:19 debt but she didn’t say if she has a 25:21 credit card account it’s possible that 25:24 her credit limits could have dropped or 25:26 that she’s being penalized for having no 25:28 utilization and if that’s the case she 25:31 could request a credit limit increase or 25:34 even start using a credit card to 25:35 continue building a positive payment 25:37 history 25:38 if michelle had credit accounts in the 25:41 past like maybe a car loan that’s now 25:43 paid off it’s possible that her average 25:46 age of credit has decreased or that 25:48 she’s being dinged for not having any 25:51 diversity in her credit profile and if 25:54 she does have a credit card she may have 25:56 used it to make a purchase with the 25:58 intent to pay it off right away but as i 26:00 explained if you rack up a credit card 26:03 and the balance gets reported to the 26:05 credit bureaus that could be the reason 26:07 for her credit score drop but michelle i 26:10 would say that if you simply follow my 26:12 recommendations to use a credit card 26:14 strategically by making smaller charges 26:18 that you pay off in full your score 26:20 should rebound within the next few 26:22 months so thank you michelle again for 26:24 your question and i hope this has helped 26:27 everybody understand some of the main 26:29 reasons why you might have seen a credit 26:31 score drop and if you’re stressed about 26:33 your credit or know that it’s keeping 26:35 you from reaching your financial goals i 26:37 would definitely recommend checking out 26:38 my online class called build better 26:41 credit it will put you on the road to 26:42 more success and less financial stress 26:45 build better credit gives you all the 26:47 tools that credit professionals are 26:49 using and charging thousands of dollars 26:51 for you’ll learn what to do when to do 26:54 it and how to do it so you repair your 26:57 credit and get the financial life you 26:59 deserve I love online learning because 27:02 you get lifetime access to the content 27:04 and you can learn at your own pace and 27:06 for this audience I’m offering a huge 27:08 discount because you’re in the money 27:10 girl community so you can get the 27:12 discount or just learn more by texting 27:14 the phrase credit course to the number 27:17 three three four four four again credit 27:20 course with no space to the number three 27:23 three four four four or you can get more 27:25 information at laura dee Adams com I 27:28 hope to see you in class 27:30 if you have a money question or an idea 27:32 for a future show topic we would love to 27:34 hear it 27:35 we’ve got a voicemail line if you’d like 27:37 to call in your question or comment call 27:39 three zero two three six four zero three 27:42 zero eight to leave your message be sure 27:45 to join me next week when I’ll be 27:46 talking about social security scams this 27:49 is a growing problem so you really need 27:51 to understand how to recognize a scammer 27:54 how to stay safe and what to do if 27:56 you’ve been targeted by an identity 27:58 thief 27:59 be sure to subscribe to the money girl 28:00 podcast so you’re notified when each new 28:02 episode is available money girl is 28:05 produced by the audio wizard Steve Ricky 28:07 Berg with editorial support from Karen 28:10 Hertzberg if you’ve been enjoying the 28:12 podcast please rate and review it on 28:14 Apple podcasts you might also like the 28:17 backlist episodes and show notes that 28:19 are available at quick-and-dirty 28:21 tips.com that’s all for now I’ll talk to 28:24 you next week until then here’s to 28:27 living a richer life 28:30 [Music] 28:33 [Applause] 28:34 [Music]
Michelle B. says: “I normally don’t worry much about my credit score and I don’t need to use it for anything right now. But my FICO score for June was 785 and now for July, it’s 747. I didn’t do anything different that I can recall. I don’t have a mortgage or any debt and I’m never late on bills. I reviewed my credit reports in the past six months and didn’t see any red flags on them. Can you help me understand why this drastic change occurred and if I should be worried about identity theft?”
Michelle, thank you for this question. I know that seeing your credit score drop suddenly and for no apparent reason can be frustrating. In this post, I’ll explain why scores fluctuate and when you should be worried about a drop. I’ll also cover tips to boost your scores quickly, so an unexpected credit score dip won’t hurt your finances.
What Affects Your Credit Score?
One of the biggest misconceptions about credit is that you only have one credit score, such as FICO. While FICO is a popular type of score, there are actually hundreds of different credit scoring models that are used by mortgage lenders, credit card issuers, insurers, and merchants. There are even multiple types and versions of FICO scores.
Each scoring model uses a complicated algorithm to evaluate you based on the information in your credit reports at the nationwide credit bureaus: Equifax, Experian, and TransUnion. The higher your score the less risky you appear to potential creditors and merchants.
Here are the ranges for some popular credit scores:
FICO Mortgage Score: 300 to 850
FICO Auto Score: 250 to 900
FICO Bankcard Score: 250 to 900
VantageScore: 501 to 990
TransUnion: 300 to 850
In addition to having different score ranges, each scoring model puts emphasis on different factors. For instance, having a missed payment on an auto loan might be weighed more heavily when factored into an auto scoring model.
The exact formula that a credit scoring company uses is kept confidential. However, FICO says they use the following factors and weights as a baseline:
Payment history (35%) – such as late payments, accounts in collections, and bankruptcies affects your score the most. Making payments on time is a critical factor for maintaining good credit.
Amounts owed (30%) – is also known as credit utilization, which is the amount of debt you have compared to your available credit. Using a smaller percentage of your available credit boosts your score.
Age of credit history (15%) – is how long you’ve had credit accounts open. Having older accounts improves your score.
New credit inquiries (10%) – are applications for new credit accounts, which can temporarily lower your score.
Mix of credit types (10%) – is the variety of credit accounts in your name, such as credit cards, auto loans, and mortgages. Having a mix of credit types helps improve your score.
Additionally, the data used by a credit model varies depending on where it comes from. The credit bureaus may have slightly different information about you. That’s because creditors may only report your payment information to one or two of them. That means a credit score depends on which scoring model and credit bureau are used.
Since there’s so much variation in credit scores, doing an apples-to-apples comparison and looking for trends is what’s most valuable. Your actual score isn’t as important as making sure your FICO or VantageScore is moving up or holding steady over time.
8 Reasons Your Credit Score Dropped Suddenly
You’ve become the victim of identity theft.
You have an error in your credit reports.
You unintentionally missed a payment due date.
Your credit utilization increased.
You have no credit utilization.
Your average age of credit decreased.
Your credit mix has changed.
You made a large purchase on credit.
While it’s not usual for credit scores to fluctuate a few points from month to month, a larger drop of 20 points or more may indicate a problem that should be investigated right away.
Since Michelle doesn’t have any late payments or changes with her accounts, why has her credit score dropped 38 points? We’ll review eight reasons for a sudden score drop and what you and Michelle should do about it.
1. You’ve become the victim of identity theft.
This is by far the worst and most serious reason you could see your credit scores plummet. If a thief steals your personal information and takes out a loan or gets a credit card in your name, he or she isn’t likely to pay the bill.
Since payment history is a top factor in how credit scores are calculated, even one missed payment will cause your scores to instantly drop. Review your credit reports for suspicious activity such as accounts that aren’t yours and higher-than-normal balances on existing accounts. If nothing is amiss, your score drop must be due to something else.
But if you have become the victim of identity theft, act as quickly as possible to minimize the damage. Contact any creditor listed on your credit report that you don’t recognize and ask to speak with their fraud department. Then place a fraud alert on your credit reports with the credit bureaus so no new accounts can be opened in your name.
File disputes with each of the credit bureaus where the fraudulent information appears. Also, file a police report so you have proof that a crime was committed against you.
A cybercriminal can use your personal information to make purchases on your existing credit card accounts or even drain your checking or savings. So, change the passwords on all of your online financial accounts to help prevent future theft.
Remember that the best way to protect your credit and identity is to regularly check your credit reports for unauthorized activity. It’s easier than ever to stay on top of your credit by signing up for free access and alerts at sites such as Credit Karma and Credit Sesame.
Our Identity Theft Protection tool can help protect you and your family from identity theft. Sign up today and try it free for 30 days.
As you review your credit reports looking for evidence of fraud, you may find other errors that are to blame for a sudden drop in your credit scores. For instance, inaccurate late payments, account balances, and available credit limits may be dragging down your scores without you knowing it.
File a dispute with each of the credit bureaus that shows any inaccurate information. Then contact the creditor that reported the error and ask them to correct the data with the credit bureaus. Be prepared to send the documentation that helps you prove a creditor’s error.
It may take a month or two before an error gets researched and updated. So keep checking your credit reports to make sure the problem gets resolved and your scores rise.
3. You unintentionally missed a payment due date.
As I previously mentioned, how you pay bills is the single most important factor that credit scoring models use to calculate your scores. I call payment history “the king of credit” because it makes up the largest percentage of a typical credit score.
When you have a record of paying accounts on time, it shows that you’ve been responsible with money. It suggests that your good behavior will continue, and you won’t default on debt in the future.
Likewise, having late payments or accounts in collections are serious red flags that you haven’t been dependable and that you may not repay debts with regularity or at all. The consequences are stiff. Even making just one late payment can drastically reduce your scores, especially if you have good or excellent credit.
But what if you did pay on time? If you check your credit reports and are surprised to see a late payment, act quickly to settle your account. Maybe your payment got lost or damaged in the mail or there was a glitch with your online bill pay service.
If you can prove to a creditor that you did pay on time, they may be willing to cut you some slack, especially if you’ve been a good customer. Pay your bill as quickly as possible and request that the late payment with the credit bureaus be reversed.
Also, note that a late payment can’t be reported to the nationwide credit bureaus until you’re 30 days past due. So, if you miss a payment due date, but quickly get caught up, your mistake won’t show up on your credit reports.
I mentioned that the second most important factor in credit scores is how much debt you owe and your credit utilization. Using a smaller percentage of your available credit on revolving accounts (such as credit cards and lines of credit) boosts your scores. And the opposite is true when you use more of your available credit. That causes your utilization ratio to spike and your credit scores to quickly drop.
What may surprise you about credit utilization is that it can increase even if you haven’t been maxing out your credit cards. For instance, if your card issuer cuts your available credit limit, your utilization ratio would go up. You’d have the same outstanding balance compared to a smaller credit line, which makes you appear less favorable to credit scoring models.
Card issuers set your spending limit when you first open an account, but they can increase or decrease it according to the terms of your agreement. If an issuer sees signs of risk, such as large cash advances or a card that hasn’t been used for an extended period, they can take action to protect themselves by reducing your credit limit or closing your account altogether.
If you’ve had a credit line cut or canceled, review your credit report for any inaccurate information that might have been a concern to your creditor. Then dispute any errors on your credit reports and contact the creditor to discuss raising your credit limit.
5. You have no credit utilization.
While having low credit utilization on revolving accounts is one of the best ways to build and maintain great credit, don’t go overboard by going down to zero utilization. You must have credit accounts and use them responsibly in order to have enough data to generate credit scores.
It’s not necessary to carry debt from month to month or pay any interest in order to build credit. You simply must have open accounts that show some activity, such as making small charges from time to time that you pay off in full. This is a smart strategy that doesn’t cost anything and allows you to build great credit over time.
I mentioned that the age of your credit accounts is a relatively small factor in your credit scores. Credit models figure the total months that all of your accounts have been open and divide by the number of accounts you have.
Having a long credit history helps lenders know if you’re likely to be financially responsible in the future and are a good credit risk. So, the longer you’ve had credit accounts open in your name, the better.
Once a credit account is closed or paid off, your average age of accounts begins to decrease. If you close a really old account (such as a credit card that’s been in your name for decades), it has a more negative effect on your credit scores than if you closed a younger account.
Also, when you open a new account, you immediately reduce the average age of your accounts, which may cause a drop in your scores. To make sure your average age of credit accounts grows over time, only open new accounts when it’s absolutely necessary. And make sure to keep your oldest accounts open and active.
Many people mistakenly believe that they should immediately close a credit card after paying it off. A better option is to leave a paid-off card open and use it once a while for a small charge that you pay off in full. That allows you to leverage its positive payment history, longevity, and available credit limit to raise your credit scores.
Is your credit rating holding you back? Find out how to fix it.
While it’s not the most important factor in how your credit scores are calculated, having a mix of different types of accounts helps increase your credit scores. For instance, having revolving accounts, such as a credit card or line of credit, in addition to installment accounts, such as a car loan or mortgage, shows lenders that you can handle different types of credit responsibly.
So, if you just paid off the only installment loan you have, your credit mix looks less diverse to lenders and there’s not much you can do about that. Unless you need to finance a purchase, like a home or a car, I don’t recommend taking a loan just for the sake of boosting your credit.
If you maintain good habits, like paying credit cards and utility bills on time and maintaining low utilization rates, your credit scores will naturally go up over time. As is often the case, you’ll get the best scores by using credit – as long as you use it wisely.
8. You made a large purchase on credit.
Making a large credit card charge is one of the most common reasons for an unexpected credit score drop. You might think that it won’t matter, as long as you pay your credit card bill in full by your statement due date.
Problem is, your credit card company may report your balance to the credit bureaus before your payment was received. In other words, paying off your entire credit card balance every month generally does not improve your utilization ratio.
The bottom line is that if you use more of your available credit, it’s a mathematical signal that you might make late payments in the future and are a higher credit risk.
Follow these tips to reduce your utilization ratio and boost your scores:
Never charge more than 20% of your available credit limit on any one card or on a total of all your credit cards.
Request a credit limit increase on your credit cards.
Open an additional credit card and spread out charges on multiple cards instead of maxing out one card.
Make multiple payments during the month to increase the likelihood that a lower balance gets reported to the credit bureaus.
Now that you understand eight common reasons why your credit scores can take a dive, let’s get back to Michelle’s situation. She said that her credit reports looked good within the past six months. If she hasn’t reviewed them within the past month, she should. But let’s assume that she isn’t the victim of identity theft, doesn’t have any errors on her reports, and didn’t make a late payment.
Michelle mentioned having no debt, but she didn’t say if she has credit card accounts. It’s possible that her credit limits could have dropped or that she’s being penalized for having no utilization. If that’s the case, she could request a credit limit increase or start using a credit card to continue building a positive payment history.
If Michelle had credit accounts in the past that are now paid off, it’s possible that her average age of credit has decreased or that she’s being dinged for not having any diversity in her credit profile.
If she does have a credit card, she may have used it to make a purchase with the intent to pay it off right away. As I explained, if the balance was reported to the credit bureaus, it could be the reason for her score drop. But if she follows my recommendation to use a credit card strategically her scores should rebound within the next few months.
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Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release.
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