Has your credit score suddenly dropped or does it keep fluctuating? Unfortunately, this is not uncommon, and most likely, you haven’t done anything wrong. That said, it falls on you to find out the reason behind the plunge and initiate appropriate fixes. As a quick guide, below are the frequent causes of credit drops and how to get back on track.
1. Identity Theft
If a scammer were to assume/steal your identifying information and open credit lines in your name, your credit score is bound to drop. With financial systems now being interlinked with mobile apps, cases of identity theft are on the rise, and curbing them takes ingenuity.
Worry not though, with credit monitoring services, you can keep an eye on fraudulent entries on your credit report.
The fix: Start by reporting ID theft to the relevant state or federal authority. Next, armed with the necessary documentation, notify and authorize credit reporting bureaus to place an alert on your report.
2. Paying Off a Loan
You read that right, clearing a loan can cause a sudden credit score drop. Why? It all has to do with how your score is calculated with credit mix accounting for 10%. As such, paying off a loan changes the overall diversity of your credit lines, lowering your score.
The Fix: First off, don’t apply for a loan that you don’t need just to improve your credit mix. Instead, concentrate on other factors such as timely payments on your remaining account that contributes more (35%) to your credit score.
3. Applying for Several Lines of Credit
Outrightly, suddenly opening multiple credit cards or personal loans is a red flag to creditors. It signifies a person who is unable to live within their means or handle upcoming financial obligations.
The drop is brought about by hard inquiries made in quick succession on your report. Typically, a dip is brought about by inquiries made on credit cards, as opposed to an auto loan or mortgage, within the reporting period.
The Fix: Do not apply for cards that you do not absolutely need. Also, it’s best to get your creditor to increase your card limit in lieu of applying for new cards.
4. Erroneous Entries on Your Credit Report
Banks and other lenders are known to make errors when reporting your credit activities. As a matter of fact, inaccurate information is one of the main issues handled by the Consumer Financial Protection Bureau (CFPB). Common errors include:
- Unknown accounts
- Wrong personal information
- Settled debts not reported as cleared
- Payments reported as missed
According to Forbes, one or a combination of such errors can be responsible for a drop of up to 100 points.
The Fix: Once you identify such mistakes, the first step is to raise a complaint with the CFPB and the reporting bureaus. To speed up the process, also raise a dispute with the company that led to the mistake in the first place. By law, they are required to investigate and rectify reporting errors free of charge. A credit repair company can also help identify the errors and facilitate disputes on your behalf.
5. Missed Payments
As noted earlier, your repayment history accounts for 35% of your credit score. This makes loan repayments a huge factor in how lenders view you. As such, a single missed payment can lower your score steeply. Nonetheless, it is expected that payments can be late; it is the period that debt goes unpaid that you should worry about.
The Fix: Generally, there is a grace period of 30 days before credit bureaus consider you to have defaulted on a payment. So, while you may incur late fees for missed payments, ensure that you clear the payment before the grace period lapses.
And in the event that you are unable to continue making payments in time, negotiate with your lender to restructure the facility for smaller repayments over a longer repayment period.
A drop in your credit scores can be detrimental to your ability to access credit and on favorable terms. The reasons behind the drop could be your own doing, mistakes by the reporting bureaus, or even due to fraud. Ultimately, it falls on you to monitor, identify, and ensure that your score stops dropping, and where possible, mistakes are corrected.