Why Is My Credit Score Dropping?
Having a good credit score is important for all adults. Credit is used to acquire the many things that life has to offer; such as owning your own home, buying or leasing a car, opening and maintaining a business, obtaining a credit card, receiving a good rate on your car insurance, and so much more. Without it, you will find that it is difficult to acquire anything without paying a high-interest rate if you even qualify.
Keeping on top of your credit score is your responsibility and an important one at that. There are several ways to monitor your score. If you find that your credit score has dropped, it is equally important to find out why.
Need some financial advice about your credit? Here are some reasons why your credit score may be dropping:
Late or Missed Payments
Missing or making a late payment on any of the accounts that are reported to credit agencies can lower your credit score. Since payment history accounts for 35% of your credit rating, you can see why sticking to your monthly payment schedule is important. If you have recently missed a payment, be sure to pay it as soon as possible to avoid any decline in your score.
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High Credit Utilization
Credit utilization is a major factor in configuring a credit score. It is the credit to debt ratio between what you owe and your total credit limit. While you may be approved for $1,000 in credit, you should only utilize 30%, or $300, of that to keep your credit in good standing. Anything higher than 30% can result in a drop in your score.
Making an Inquiry
Anytime you make an inquiry on your credit it takes a hit. Whether that hit is of no importance or will certainly make an impact is determined by the type of inquiry that is made. Some inquiries are considered to be a “soft” inquiry that will have little to no impact on your credit, while a “hard” inquiry will have a higher impact.
Closing A Credit Card
Closing a credit card, while you have other accounts open can affect your credit. Since credit utilization is a factor, as mentioned already, you should only be utilizing 30% of your total credit limit. So, when closing a credit card, it important to know that the credit limit on that card will be deducted from your total credit limit and can cause your utilization to rise above 30%.
Credit Limit Being Lowered
If a credit limit is lowered, it would have the same effect as if you closed an account. The credit utilization will come into play, and again, if you are using more than 30% of your total credit limit than your credit score can drop.
Inaccurate Credit Reporting
While it does not happen often, mistakes can happen, causing inaccurate credit reporting on your accounts. You may also find yourself in this situation if you have been a victim of fraud or identity theft. This is another reason why it is important to monitor your credit and the activity in your accounts.
Note: The content provided in this article is only for informational purposes, and you should contact your financial advisor about your specific financial situation.