Did your credit scores drop for no apparent reason? Use these wise tips to boost your scores quickly so an unexpected credit score dip doesn’t hurt your finances.

26 minute read

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Hello everyone, it’s me your friend Laura Adams. In your ears again with a never equal episode of the money girl podcast. If you’re new to the show I am so glad to have you here. I’m a personal finance author, speaker, spokesperson, and consumer advocate. And if you’re a longtime listener, which I know many of you are, thank you so much for being a part of this community. I’ve been writing and hosting this show since 2008 and I love connecting with you. The mission for the show is to give you the knowledge, resources, and motivation to manage your money the best ways possible and create a richer life. And today’s show is for you if you are concerned about a recent drop in your credit score. Or maybe you just simply want to make sure that your credit keeps on moving up and never goes back down. And even if you think that your credit is not a major priority in your life. Maybe you’re thinking well Laura, I’m not in the market for a home or a big purchase like a car, and I don’t want a new credit card etc. I want you to understand that maintaining great credit is still a critical part of your overall financial health. It affects so many aspects of your finances even if you don’t plan on borrowing any money. It’s going to affect the rates that you pay for certain types of insurance. It affects the offers that you get for things like wireless phone plans. The ability to rent a home or apartment, in many cases hinges on your credit. And even your ability to get a job with an employer who may review your credit as part of their screening process. And there are more things in our life that credit effects, but those are the main ones that a lot of people are surprised about.
And today’s podcast was inspired by a question from Michelle B. From Orlando who 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 its 747. I didn’t do anything different that I can recall. I don’t have a mortgage or any debt. 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 something like identity theft?
Michelle, thank you for this question and for previous questions that you’ve sent in. I know that seeing your credit score drops suddenly and for no apparent reason really can be frustrating and a little confusing as well. In this podcast, I’m gonna explain why scores fluctuate. And when you should be worried about a drop. I’m also going to cover tips to boost your scores quickly, so an unexpected credit score dip doesn’t hurt your finances. You’ll find the notes for this, and every show, with links to resources that I mentioned, plus the full archive of podcasts over in the money girls section at quickanddirtytips.com.
This is episode number 599 called, “Eight reasons your credit score dropped and what to do”.
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Alright, so let’s talk about credit. I think one of the biggest misconceptions about credit is that you only have one credit score, like FICO. A lot of us have heard of FICO, so you may just think well that’s what a credit score is. And while FICO is a very popular type of score, there are actually hundreds of different credit scoring models that are used by mortgage lenders, credit card issuers, insurers, and you know a variety of other merchants. There are even multiple types and versions of FICO scores. And each scoring model is a little different. All use a pretty complicated algorithm to evaluate you based on the information in your credit reports. And those reports are at the nationwide credit bureaus, Equifax, Experian, and Transunion. And of course, the higher your score, the less risky you appear to potential creditors and merchants. So, let me give you some of the most popular scores and the ranges so, just so, you have an idea of what I’m talking about. For the FICO mortgage score, that ranges from 300 to 850. But the FICO auto score ranges from 250 to 900. The FICO bankcard score ranges from 250 to 900. And the Vantage score ranges from 501 to 990. And then there’s the Transunion score, that ranges from 300 to 850. So, you can see they’re all slightly different. And in addition to having different score ranges, each scoring model puts emphasis on different factors. For instance, let’s say you missed a payment on an auto loan. Well, that might be weighed more heavily when factored into an auto scoring model if you’re going for an auto loan then it would be factored into a different scoring model. And the exact formula that a credit scoring company uses, is kept confidential. However, FICO is pretty transparent, and they say that they use the following factors and weights as a baseline. The most important factor that FICO uses is your payment history. They say this makes up 35 percent of a FICO score. Payment history is things like any late payments, accounts in collections and any bankruptcies. These affect your score the most, so making payments on time is a critical, critical factor for maintaining good credit. FICO says the second most important factor is amounts that you owe, and that’s 30 percent. This is also known as credit utilization. It’s the amount of debt that you have compared to your available credit limit. And they also look at just the total amount of debt that you have as a number. And using a smaller percentage of your available credit will always boost your score. They also look at age of your credit history, that’s 15% of your FICO score. This is how long you’ve had credit accounts open in your name. Having older accounts improves your score. They also evaluate your new credit inquiries, that’s ten percent of your score. This is any applications that you may make for new credit accounts like, a new credit card or a new loan, that will temporarily lower your score. And lastly, the mix of credit types is 10%. This is the variety of credit accounts in your name, such as credit cards, auto loans, and mortgages. Having a mix of credit types actually helps improve your score. Additionally, the data used by a credit model varies depending on where it comes from. The credit bureaus may all have slightly different information about you. So that’s why if you get a score from, let’s say, Experian and you get one from Transunion. And not only might it be different because these score ranges are different, but it can be different because they have slightly different information about you. And that’s because creditors may only report your payment information to one or two of the credit bureaus, instead of all three of them. So your information may not match 100% from credit bureau to credit bureau. The bottom line is that a credit score is going to depend on which scoring model is used, and which credit bureau is used. Since there’s so much variation in credit scores, doing an apples to apples comparison and looking for trends is really what’s most valuable to us as consumers. Your actual score, the number, really isn’t as important as making sure that your FICO or your vantage score is moving up over time or at least holding steady over time.
Well it’s not unusual 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 is her credit score dropped 38 points? Well, we’re going to review eight reasons for a sudden score drop and what you and Michelle should do about it.
Alright, the first reason is 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 is not likely to pay the bill. Now, I’m not saying that that’s what has happened with Michelle. She did let me know that she reviewed her credit reports, and everything looks ok, so we’ll talk more about what could be going on with Michelle. Since payment history is a top factor in how credit scores are calculated, even one missed payment will cause your scores to instantly drop. So, definitely review your credit reports for any suspicious activity like accounts that are not yours or higher than normal balances on existing accounts. And if nothing is amiss your score drop must be due to something else and as I mentioned, that’s got to be the case with Michelle. But if you have become the victim of identity theft, you’ve got to act quickly to make sure that you minimize the damage. You want to 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 that no new accounts can be opened in your name. You also want to file disputes with each of the credit bureaus where the fraudulent information appears. And file a police report so that you’ve got proof that a crime was committed against you. A cyber-criminal can use your personal information to make purchases on your existing credit card accounts. They can even drain your checking or your savings accounts. So definitely change the passwords on all of your online financial accounts to prevent any future theft. Remember, that the best way to protect your credit and your identity is to regularly check your credit reports for unauthorized activity. In a lot of cases that’s your first sign that something bad is happening. It’s easier than ever to stay on top of your credit. You can use annual credit report.com, that’s the site where you can get in annual free copy of each of your reports. Or you can sign up for free access more frequently. In a lot of cases, there are sites that will give it to you monthly or even with unlimited access at a variety of free credit sites. And I’ll list some in the notes for the show in the money girls section at quick and dirty tips.com.
Alright, let’s move on to the second reason why your scores may have dropped. You may have an error in your credit reports. So, 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, there could be inaccurate late payments, account balances that are incorrect, or your available credit limits may be wrong and maybe dragging down your scores without you knowing it. So, if you see anything that is not right, definitely file a dispute with each of the credit bureaus that shows that inaccurate information. And remember, as I mentioned, it may not be across all three of the bureaus. So you’ll want to check all three and then file a report or file a dispute where needed. Then contact the creditor that reported the error and ask them to correct the data with the credit bureaus. Be prepared to send any documentation you have that will help you prove a creditors error. And it may take a month or two before an error gets researched and updated. So just keep checking your credit reports to make sure that the problem does get resolved and that your scores will go back up.
Reason number three that your scores may have dropped is, you unintentionally missed a payment due date. As I previously mentioned, how you pay bills is the single most important factor that a credit scoring model uses 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 is going to continue and that you’re not going to default on debt in the future. Likewise, having late payments or accounts in collections, are very serious red flags that you have not been dependable. And that you may not repay debts with any regularity or at all. But that’s why the consequences are pretty stiff when you have a late payment. Even making just one late payment can drastically reduce your scores. And this is especially true if you have good or excellent credit. You’ll see a pretty steep drop in your scores. But let’s say you did pay on time and there’s just an error there well if you check your reports and you are surprised to see a late payment you’ve got to act quickly to settle your account. Maybe your payment got lost in the mail or damaged in the mail or there was a glitch with your online bill pay service. Try to figure out what’s going on and just make sure that you can prove to a creditor that you did pay on time. And if you can do that, they may be willing to cut you some slack, especially if you’ve been a good customer. Just 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 your 30 days past due. So what that means is, if you miss a payment due date by just a few days or even a week and you quickly get caught up your mistake won’t show up on your credit reports.
All right let’s take a short break to thank the amazing sponsors who help keep money girl going for you week after week. And then we’ll cover the remaining five reasons why you may have seen a credit score drop.
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Alright, we’re back on the fourth reason why your credit scores may have dropped and that is your credit utilization increased. 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, these are your credit cards and lines of credit, using smaller amounts boost 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 too quickly drop. And 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. Why, well, you’d have the same outstanding balance compared to a smaller credit line and that 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 even closing your account altogether. So, if you’ve had a credit line cut or cancelled, 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, that will reduce your utilization ratio and help boost your scores.
Reason number five your scores may have dropped is you have no credit utilization well having low credit utilization on revolving accounts is one of the best ways to build and maintain great credit. You can’t go overboard by going down to zero utilization. You’ve got to have credit accounts and use them responsibly in order to have enough data to even generate a credit score. But don’t get me wrong, it is not necessary to carry debt from month to month or to 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. That’s a smart strategy that doesn’t cost anything and allows you to build great credit over time.
Number six your average age of credit decreased. 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 divided by the number of accounts you have to come up with an average. Having a long average 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 that 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 let’s say you’ve had a credit card in your name for decades and you close it that will have a more negative effect on your credit scores then if you closed a relatively young account. Maybe something you only had open for a few months or a year. Also, when you open a new account you immediately reduce the average age of your accounts, which may cause a drop in your credit scores. To make sure your average age of credit accounts grows slowly 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 well that typically is not a great idea. A better option is to leave a paid off card open and use it once in a while for a small charge that you pay off in full. That allows you to leverage its positive payment history, its longevity, and the available credit limit to raise your credit scores.
All right the seventh reason your scores may have dropped your credit mix has changed. 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 scores. For instance, having revolving accounts, such as a credit card or a line of credit, in addition to installment accounts, such as a car loan or a 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 you know, there’s not much that 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. I do recommend having credit cards open in your name, but you don’t necessarily want to take out a loan just to boost your credit. If you maintain good habits, like paying credit cards and utility bills on time, and maintaining those low utilization rates, your credit scores will naturally go up over time. As is often the case you’re going to get the best scores by using credit, as long as you’re using it wisely and responsibly. And by the way, if you want to learn a lot more about taking control of your credit and pursuing your financial dreams, I would encourage you to check out my online class. We go way in-depth into this topic. The class is called, “Build better credit the ultimate credit score repair guide”. It teaches all aspects of building credit from scratch, how to prepare for a major purchase, in dealing with creditors wisely. I’ll tell you a little bit more about it at the end of the show.
And our last reason number eight 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 doesn’t matter as long as you pay your credit card bill in full by your statement due date. Now that’s definitely what I recommend doing. Problem is, your credit card company may report your balance to the credit bureaus before your payment is received. In other words, paying off your entire credit card balance every month generally does not improve your utilization ratio. So this is why you never want to exceed about 20 percent of your available credit limit on an individual card. 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. So in order to keep your utilization ratio low and boost your scores never charge more than 20% of your available credit limit on any one card or on a total of all of your cards. You can help this by requesting a credit limit increase one or more of your credit cards that’ll give you a little bit more room. Another tip is to open an additional credit card and spread out charges on multiple cards instead of maxing out one card. And finally, you can make multiple payments during the month to increase the likelihood that a lower balance will get reported to the credit bureaus.
Okay now that you understand eight common reasons why credit scores can take a dive, let’s get back to Michelle situation. She said that her credit reports looked good within the past six months. Now, I’m not really sure what that means. If she hasn’t reviewed them, i would say within the past month, she should. But, let’s assume that she is not the victim of identity theft, that she doesn’t have any errors on her reports, and she didn’t make a late payment. Michelle mentioned having no debt, but she didn’t say if she has a credit card account. It’s possible that her credit limits could have dropped or that she’s being penalized for having no utilization. And if that’s the case she could request a credit limit increase or even start using a credit card to continue building a positive payment history. If Michelle had credit accounts in the past, like maybe a car loan that’s 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. And 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 but, as i explained, if you rack up a credit card and the balance gets reported to the credit bureaus that could be the reason for her credit score drop. But Michelle, i would say that if you simply follow my recommendations to use a credit card strategically, by making smaller charges that you pay off in full, your score should rebound within the next few months. So, thank you Michelle again for your question and i hope this has helped everybody understand some of the main reasons why you might have seen a credit score drop. And if you’re stressed about your credit or know that it’s keeping you from reaching your financial goals, i would definitely recommend checking out my online class called “Build better credit”, it will put you on the road to more success and less financial stress. “Build better credit” gives you all the tools that credit professionals are using and charging thousands of dollars for. You’ll learn what to do, when to do it, and how to do it. So you repair your credit and get the financial life you deserve. I love online learning because you get lifetime access to the content and you can learn at your own pace. And for this audience I’m offering a huge discount, because you’re in the money girl community. So you can get the discount or just learn more by texting the phrase “creditcourse” to the number three three four four four. Again, “creditcourse” with no space to the number three three four four four, or you can get more information at lauradadams.com. I hope to see you in class. If you have a money question or an idea for a future show topic, we would love to hear it. We’ve got a voicemail line if you’d like to call in your question or comment. Call three zero two three six four zero three zero eight to leave your message. Be sure to join me next week when i’ll be talking about social security scams. This is a growing problem, so you really need to understand how to recognize a scammer, how to stay safe, and what to do if you’ve been targeted by an identity thief. Be sure to subscribe to the money girl podcast so you’re notified when each new episode is available. Money girl is produced by the audio wizard Steve Ricky Berg with editorial support from Karen Hertzberg. If you’ve been enjoying the podcast, please rate and review it on Apple podcasts. You might also like the backlist episodes and show notes that are available at quick-and-dirty tips.com that’s all for now. I’ll talk to you next week. Until then, here’s to living a richer life. [Music] [Applause] [Music]

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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

  1. You’ve become the victim of identity theft.
  2. You have an error in your credit reports.
  3. You unintentionally missed a payment due date.
  4. Your credit utilization increased.
  5. You have no credit utilization.
  6. Your average age of credit decreased.
  7. Your credit mix has changed.
  8. 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.

Working to improve your credit? This tool can help you identify potential errors and make disputes. Try it free for 14 days.

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2. You have an error in your credit reports.

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.

See also: 3 Best Tips to Improve Your Credit Score

4. Your credit utilization increased.

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.

See also: How to Get Credit With No or Bad Credit

6. Your average age of credit decreased.

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.

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7. Your credit mix has changed.

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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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

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. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

Published by Debt.com, LLC