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5 Lesser-Known Reasons Why Your Credit Score Drops

Are you frustrated because your credit score dropped suddenly for no apparent reason? Laura answers a listener question and covers 5 lesser-known reasons why credit scores can drop unexpectedly. These tips will help you raise your credit score as quickly as possible.

By
Laura Adams, MBA,
Episode #467

The bottom line is that if you’ve been using more of your available credit lately, it’s a mathematical signal that you might be in financial trouble and could make late payments in the future.

In order to reduce your utilization ratio and boost your score you have the following options:

  • Charge less each month 
  • Ask for a credit card credit limit increase 
  • Open an additional card and spread out charges on multiple cards 
  • Make multiple payments during the month so a lower balance gets reported to the credit bureaus

The bottom line is that if you’ve been using more of your available credit lately, it’s a mathematical signal that you might be in financial trouble and could make late payments in the future.

To raise your FICO or other credit scores never charge more than 20% of your available credit on any one card or on a total of all your cards.

See also: Credit Utilization--What It Means for Your Credit Score

Reason #2: One of your credit limits was reduced

I mentioned that getting a credit limit increase on a credit card is one way to reduce your utilization ratio and increase your credit scores. Likewise, your credit can take a hit if your available limits are cut.

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 the issuer sees signs of risk, such as you taking large cash advances on your card or exceeding your credit limit, they can take action to protect themselves by reducing your credit limit.

Having less available credit affects your utilization in a way similar to charging more. Your utilization ratio goes up and your credit score will quickly go down.

For example, if you have a card with a $1,000 credit limit and an outstanding balance of $200, you have a 20% credit utilization ratio, which is an acceptable amount.

But let’s say your credit limit on the card is cut to $600 and you still owe $200. Now your utilization just shot up to 33% ($200 / $600 = 0.33 = 33%) and your credit score will drop.

If this happens be sure to review your credit report for any inaccurate information that might be the reason why the card issuer cut your limit. Then contact the company to get any mistakes cleared up and discuss raising your credit limit.

See also: 7 Essential Rules to Build Credit Fast

Reason #3: You have zero credit utilization

While having low credit utilization on revolving accounts is one of the best ways to improve your credit scores, don’t go overboard by going down to zero utilization.

While having low credit utilization on revolving accounts is one of the best ways to improve your credit scores, don’t go overboard by going down to zero utilization.

For instance, if you pay off your card and don’t make additional charges, some credit scoring models ding you. It’s better to have credit accounts and to use them responsibly than to let them become inactive.   

In other words, showing some amount of activity, such as making small charges and paying them off in full each month is a smart credit strategy.

Reason#4: Your average age of credit accounts changed

The age of your credit accounts tells a story about how experienced you are handling credit. That’s why credit scoring models evaluate the average age of your accounts. It's typically figured as the total months that all of your accounts have been open, divided 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 choose to close a really old account, the cancellation has a more negative affect on your credit scores than if you closed a younger one. Also, when you open a new account, you immediately reduce the average age of your accounts, which may cause a sudden credit score drop.

To make sure your average age of credit accounts will grow over time, only open new accounts when it’s absolutely necessary. And make sure to keep your oldest accounts open and active.  

Many people want to close a credit card immediately after paying it off because they think that’s better for their credit. If you can’t use a card responsibly, then you should close it.

But another option that’s better for your credit is to pay off the card, but leave the account open. That allows you to leverage its positive payment history, longevity, and available credit limit to raise your credit scores.

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

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