It’s never a pleasant surprise to see your credit score drop. However, understanding the reasons behind it can empower you to take action and get your score back on track. Whether it’s due to a missed payment, increased credit utilization, or even a mistake on your credit report, there are ways to identify the cause and address it.
Let’s dive into the top reasons your credit score might drop and what steps you can take to recover.
1. Late or Missed Payments
Your payment history is one of the most significant factors affecting your credit score. A late or missed payment can quickly cause your score to drop.
When Does It Hurt Your Score? Payments over 30 days late are reported to credit bureaus, causing a dip in your score. Payments that are 60 or 90 days late can have an even greater impact.
How to Fix It: Set up automatic payments or reminders to ensure you never miss a due date again. If you’ve missed a payment, pay it as soon as possible to minimize the damage.
2. Accounts in Collections
If a debt is passed to a collection agency, it signals to lenders that you didn’t meet your financial obligations.
Impact on Your Credit Report: Collections can stay on your credit report for up to six years, negatively impacting your score.
How to Fix It: Pay off the debt or negotiate with the collections agency to settle the account. In some cases, you may be able to request the removal of the collection entry once it’s resolved.
3. Increased Credit Utilization
Your credit utilization rate—the percentage of available credit you’re using—plays a crucial role in your score.
Why It Drops Your Score: Spending more than usual or maxing out your credit cards increases your utilization, signaling potential financial stress to lenders.
How to Fix It: Aim to keep your credit utilization below 30%. If possible, pay off your balance before your statement date to reduce the reported utilization.
4. Reduced Credit Limit
A lower credit limit can inadvertently increase your credit utilization rate, even if your spending habits remain unchanged.
Example: If your credit limit drops from $7,000 to $5,000, but you spend $1,500 monthly, your utilization jumps from 20% to 30%.
How to Fix It: Request a credit limit increase or adjust your spending to maintain a lower utilization rate.
5. Closing a Credit Card
Closing a credit card can reduce your available credit and shorten your overall credit history, both of which can negatively impact your score.
Impact on Credit History: Older accounts contribute to the length of your credit history. Closing one can lower the average age of your accounts.
How to Fix It: Only close accounts if absolutely necessary, and try to keep your oldest accounts open to maintain a strong credit history.
6. Paying Off a Loan
While paying off a loan is a great accomplishment, it may temporarily lower your credit score by altering your credit mix.
Why It Happens: A balanced mix of installment loans (like mortgages) and revolving credit (like credit cards) is favorable for your score.
How to Fix It: Don’t worry too much about this dip—your score will typically recover as long as you maintain other healthy credit habits.
7. Applying for Multiple Lines of Credit
Opening or applying for several credit accounts in a short period of time can raise red flags to lenders.
Impact of Hard Inquiries: Each application results in a hard inquiry, which can lower your score slightly. Multiple inquiries can have a compounding effect.
How to Fix It: Limit applications to only what you need. When shopping for a loan, try to keep inquiries within a 30-day window to minimize the impact.
8. Errors on Your Credit Report
Mistakes on your credit report can unfairly damage your score.
Common Errors: Incorrect account balances, duplicate entries, or accounts you didn’t open.
How to Fix It: Regularly check your credit report for errors and dispute inaccuracies with the credit bureau or lender. Errors must be investigated and corrected for free.
9. Identity Theft
If your personal information has been stolen, fraudsters could open accounts or rack up debt in your name, damaging your credit.
How to Spot It: Unrecognized accounts or inquiries on your credit report are warning signs of identity theft.
How to Fix It: Place a fraud alert on your credit file and report the identity theft to the Canadian Anti-Fraud Centre. Dispute any fraudulent entries on your credit report to minimize the damage.
Next Steps: Rebuilding Your Credit Score
Seeing a drop in your credit score can be unsettling, but with the right steps, it’s often temporary. Here’s how to recover:
1.Identify the Cause: Use credit monitoring tools to pinpoint the reason for the drop.
2.Take Action: Whether it’s paying down debt, correcting errors, or setting up payment reminders, create a plan to address the issue.
3.Monitor Progress: Regularly check your credit report to track improvements and catch potential issues early.
Final Thoughts
Your credit score is a reflection of your financial habits, and occasional drops are normal. By understanding the reasons behind the change and taking proactive steps, you can restore your score and maintain healthy financial habits. If you have questions about how your credit score impacts your mortgage or financial goals, don’t hesitate to reach out for expert advice.