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There is tons of advice out there telling you how to improve your credit score, but what’s often overlooked are all the little things you can do that cause your score to dip. Small fluctuations in credit scores are normal but if you see a bigger dip or downward trend it’s good to find out what caused it so you can get your credit score back on track.
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The good news is many of these credit score dings are only temporary and you can easily recover from them. Some reasons why your credit score dropped may be obvious – like like late or missed payments – while others like closing old credit accounts can be surprising. And did you know that paying off a loan, while good in the long run, can ding your score?
Let’s look at the six main ways you may be causing your credit score to dip, whether you realize it or not.
1. You missed a payment
The most important factor affecting your credit score is your payment history. It makes up 35% of your credit score calculation. Missing a payment can cause your score to drop significantly, especially if it’s over 30 days late. This is true even if you usually pay on time.
What to do: First pay as soon as possible. If you normally pay on time, call and ask to be forgiven, just this once. They don’t have to do it, but it doesn’t hurt to ask. Then set up auto-pay or reminders so you don’t make the same mistake in the future.
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2. You recently applied for a new credit card
Each time you apply for a new credit card a hard inquiry is made on your credit report. While a single hard inquiry should only lower your score by a few points, multiple inquiries in a short timeframe can really cause your score to drop. Lenders view multiple credit card applications as risky behavior, indicating you might be undergoing financial stress.
What to do: Prequalify before you apply for a new credit card. This way you know if you have a shot at being approved. Then wait six months between credit card applications.
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3. Your credit card balance is higher than usual
If your credit card balance is higher than normal it means your credit utilization ratio is up. Your credit utilization ratio refers to how much of your available credit you’re using and this makes up 30% of your score. Experts recommend never using more than 30% of your available credit. A sudden large purchase can cause your credit utilization ratio to go up and your score to drop. This can be true even if you normally keep your ratio low.
What to do: Pay down your balance as soon as you can. One trick is to make multiple payments throughout the month to keep your credit utilization ratio low. You can also ask for a higher credit limit.
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4. You paid off a loan
The fact that paying off a loan can cause a dip in your credit score is illogical, but that’s exactly what it can do. This is because the diversity of your credit accounts (credit cards, mortgages, auto loans) makes up 15% of how your credit score is determined.
What to do: The benefits of being debt-free far outweigh the importance of having a diverse mix of credit. It’s better to pay off the loan and take the temporary credit dip. Over time, with responsible credit use, your score will recover.
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5. You closed an old card
Closing an old credit account that you no longer use sounds like a good idea. The problem is that it lowers your available credit which affects your credit utilization ratio as we talked about above. If it’s an older account, it also shortens your credit history which makes up 10% of your score.
What to do: Even if you don’t use a card frequently, consider keeping it open so you’ll have a longer credit history and higher credit limit. If your card comes with high fees though, it’s probably better to close it and take the credit hit.
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6. There are mistakes on your credit report
Lenders can make mistakes too and these mistakes can end up on your credit report. Inaccurate negative marks on your credit report are actually very common and can hurt your score. This can range from wrongly reported late payments to identity theft issues.
What to do: Regularly review your credit reports for errors. If you spot any, dispute them with the credit bureau. They are obligated to investigate and correct any inaccuracies.
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The Bottom Line
Seeing your credit score dip can be alarming especially if you’ve worked hard to build it up. Luckily, it’s pretty easy to figure out why it dipped and take the necessary actions to raise your score. Maybe you paid off a loan or applied for new credit. In that case, your score should be back up in no time – with continued responsible credit behavior. Or perhaps you missed a payment and it’s time to set up auto-pay to avoid the mistake in the future. Either way, these dips can be reversed. Regularly monitor your credit so that you can easily jump in and take action any time your score dips.
Want a little help raising your credit score? Check out 4 Easy Tricks to Improve Your Credit Score.
