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Decoding Sudden Drops in Credit Scores

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Has your credit score ever suddenly dropped—for no obvious reason?

The night I drafted this post, I was working late from home and started down an unlit tile-floored hall at night… Only to slip and very nearly topple backward into a large puddle of dog accident: Similar situation. Everything was fine and I’d actually been in a good mood up to that point. Sometimes circumstances beyond our control happen without warning, leaving us stripping off our favorite around-the-house pants for emergency use in mopping up a huge mess (to keep anyone from tracking critter splash everywhere else).

Puppy pee—like a credit score dip—happens. It’s never fun, but the good news is that both are survivable. Cargo pants wash (in hot water) and scores can be raised again. Neither can be done instantaneously, but they’re not the end of the world, either. Both, thankfully, are entirely fixable. When you habitually check your credit score (or you’ve signed up for credit score alerts), you can sort of become accustomed to credit score changes—and how they ebb and flow. As exciting as it can be to get an increase in your credit score, it can be just as alarming or discouragingto learn that it’s dipped, even if you knew to expect it sooner or later.

It can be difficult to pinpoint an exact reason for a drop because the credit score calculation system is pretty complex.Everyone’s credit score is based on information in their credit report. As a result, if your score drops out of the blue, it’s often because of a change to the information in your credit report. Unfortunately it doesn’t always have to be a big change for your credit score to descend, either. That’s why we’re going to look at a few possible reasons why someone’s credit score may drop.

Why Do Drops Suddenly Happen?

Sometimes there’s a clear explanation and sometimes there isn’t. The most common reasons aren’t that difficult to guess at. If you know that a payment was more than 30 days overdue, there’s your answer, right there: Payment histories are the single biggest factor in determining a credit score. Credit card (and loan) payments that run more than 30 days late are always reported to the credit bureaus. The bureaus, in turn,make this reflectin your credit score. Anytime that a payment runs this far past when it was due, once that tardiness is noted on your credit report, your credit score, in all likelihood, is going to run lower.

It might be tempting to joke and say, “well that’s it, then: I just can’t pay anymore, period. That’ll fix it,” but don’t. That could only make things much worse. God forbid, but if you were brain damaged one day to the point of wanting to hurt your credit score (and maximize the damage), letting an unpaid account go to a collection agency would probably be your single best/worst move.

Falling behind on the payments to your non-credit accounts, like a phone or ISP bill, can get you a bad credit rep, too. The balance owed can be sent to a collection agency—and it’s a standard industry practice to include that data on your credit report. Wheneverthat collection shows up on the report, you could set a watch by the drop you’re soon to see in your score.

Sometimes, in a weird way, it drops for a reason that could ultimately be positive for you, long-term: Whenever they calculate credit scores, FICO categorizes people into different groups, known as scorecards. Your credit profile is compared to those of other people’s within your current scorecard. This is how theydetermine your credit score. It doesn’t sound like it should make sense the first time that you hear it, but your score mayactually go to the bottom of a different scorecard if any negative information falls off your credit report.

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If it helps, think of this like going from one baseballleague up to another, slightly higher, level. You’re in an overallbetterleague, but you’re starting near the near the bottom of that new league’s rankings (where everybody begins).The downside of thisis that it’s pretty much outside of your control. The upside is that—as long as you keep paying your bills on time and keep your debt low—your credit score will improve. Just hang in there and keep swinging for the fences.

Have you made any expensive purchases lately? That could be a factor, too. Your credit utilization ratio; how much of your available credit is being usedis another major factor in how your credit score gets figured. A lot of people wind up surprised about this one, but if you make a big purchase on your credit card one month, you may see a credit score drop as a result.This can happen even if you pay the balance off in full on your due date because credit card companiesusually report card balances as of the last day of the billing cycle.

This means that the balance on your card statement becomes the balance that appears on your credit report. Relax, though: You can counter for the impact of high balances like this. You just have to pay down the amountASAP, avoid making charging anything else, and wait. That’s how you recoup those lost credit score points.

If one of your credit limits has been lowered, we have a possible culprit there, too.A lowered credit limit has the same effect as charging an expensive item does. Any time that you have a balance on a credit card with a low credit limit, your credit utilization goes up.This makes your credit score go down as a result.

Have you applied for a new credit account anytime recently?This can trigger dips, as well.Whenever you enter a new application for credit into the system, the generated inquiry is added to your credit report. Inquiries make up 10% of your overall credit score, so yes: applying for a new card can affect your credit score.While applying for new lines of credit will temporarily hurt your score, the increased credit limit is actually a good thing that can help raise it in the long run. If you don’t increase your spending, your utilization ratio will drop, which will likely help your credit score.Thankfully new applications only affect you for a year, too. As long as thatis the only inquiry thatyou make, your credit score should begin to recover, regaining ground in 12 months. When the dust settles, those hard inquiries will eventually roll off your report entirely, leaving you with an older, more diverse set of accounts (so don’t sweat it).

We know how it is: Sometimes you have to close out a card you signed for in youthful haste—because you’ve matured enough to read the fine print and learned that their APR is a killer. This is a wise move in the long run, but this can also affect your score for a time.Be careful, because if you close one out with a balance still on it, you’re looking at a dip in the near future.Sometimes a card issuer cancels a card on their end; by no choice of yours. That has the same effect. As far as your score’s concerned, who cancelled it matters much less than the fact that it the account itself was closed.

Another ultimately good thing that can initially look bad on a credit report is when a past bankruptcy finally falls off. This can happen 7 years after you declared it or 10 years after (if it was a Chapter 7 bankruptcy). The reason whyyou dip as a result is because you’ve probably been moved to a newer, better scorecard. Like we were talking about earlier, though—even though you’re in a more prestigious league (withpeople who haven’t filed for bankruptcy)—you’re starting out at the bottom. Working your way up here, just as you did in the old league, is certainly doable. You’ll just have to be patient, avoid making late (and when possible, minimum) payments, and so on.

There is one last category of score dippers: New derogatory marks. If you’re seeing a nose dive in your credit score, then you then you may have had one hit your credit report. Derogatory marks can cause a credit score to drop like a rock. Common reasons for their being issued include defaulting on a loan(s) (which gets listed after 120-180 days of non-payment), collections (which we discussed above), bankruptcies, repossessions or foreclosures, civil judgments (meaning a lawsuit that results in your owing a debt to a plaintiff), and tax liens (which the government puts against your housefor failing to pay taxes owed).

Don’t let this last category frighten you, though: While derogatory marks can stay on your credit report up to 7-10 years, their negative effects decrease over time. You might want to get in the habit of checking your credit every few months. This is the best way totry to make sure that there won’t be anything like thisimpacting your score.

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