It may be odd to think of your credit score as an asset, but that is exactly what it is. If you have a high credit score, you can rent an apartment or get better interest rates on mortgages and car loans. Credit scores are also being used to set insurance rates.
That’s why, if you notice a major drop in your credit score, you should be worried. We outlined the five major reasons your score could decrease and offer suggestions for how you can recover.
The most important factor making up your credit score is payment history, so do whatever is necessary to avoid late payments. However, if you do mistakenly miss a payment, call your creditor as soon as possible. Often, if the payment is late by fewer than 30 days, the late payment will not be reported to credit bureaus. Otherwise, the damage to your credit score will get worse every month. If you do only miss a single payment, you could request a “goodwill” adjustment in writing, and your creditor may be willing to remove it from your report.
High Debt-to-Credit Ratio
The credit scoring formulas generally treat low debt levels more favorably, but even more important is your debt-to-credit ratio. Thus, if you are using a large portion of your total credit line on your credit card account, your credit report will take a hit–even if you are paying the balances in full each month. To increase your score, you must lower your balances as soon as possible. If you spend a lot on your cards, you may want to pay down the balance even before the statement officially closes, as the statement balance is what is reported to the credit bureaus. Once you have lowered your debt-to-credit ratio, you can ask for an increased credit limit, which will further boost your score.
Closing Several Accounts
It may seem counter-intuitive, but closing a credit card account can lower your score, as it reduces your available credit, which will increase your debt-to-credit ratio. You will also decrease your overall credit history, which can hurt your credit score in the long run. If you have made this mistake, you will need to reduce your debt and increase your total credit limit. You may also consider opening a new line of credit.
Applying for Too Many Accounts
On the flip side, you do not want to apply for too many new credit cards or loans in a short period of time. This will cause issues for two reasons. First, you will be generating hard pulls on your credit report, which can lower your score. This is also a sign to creditors that you may be in financial distress. Luckily, it is easy to recover from this error. Just don’t apply for any new lines of credit for several months, and your score will rise to its previous level.
Mistakes on Your Credit Report
If you have made none of the previous mistakes, your credit score could have dropped due to a mistake. Errors are actually common and can occur for a number of reasons, such as mistaken identity or a typo when someone entered the information. Check your credit report at least yearly or whenever you see a change in your credit score. If you notice a mistake, you have a right to dispute it.