You'll likely get worried if you notice a sudden drop in your credit score. At this point, you may wonder, 'Why did my credit score drop for no reason?' Don't worry! In this post, we'll discuss the most common causes of the sudden credit score drop and what you can do about it. Let's get started!
Get A Free Mortgage QuoteWhy Did My Credit Score Drop For No Reason?
You may think the drop in your score is unexpected and sudden, but many causes contribute to it. The good news is that some are temporary and can be fixed quickly. So, before we list down the solutions, here are the common reasons behind the drop in your score:
1.Applying for a New Credit Card
The issuer will pull your credit reports whenever you submit a credit card application. They do this to ensure that the applicant is not at risk and has a good credit history. In a financial setting, this inquiry type is known as 'the hard pull or the hard inquiry'. It is likely to lower your score—dropping it a few points.
Needless to say, they may stay on your report for around two years. Overall, hard inquiries are fine if they occur in moderation.
How To Fix It?
If the reason behind the drop in your credit score is applying for new credit cards, then avoid doing that. First, focus on building credit with one credit card. Don't apply for multiple cards at the same time. This can hurt your creditworthiness and lower your hard-earned score.
2.Missing or Late Credit Card Payments
If you haven't applied for another credit card and you're wondering why your credit score dropped for no reason, it could be because of late monthly payments. Evaluate your monthly credit card payment trend.
So, if you're more than thirty days past due on your payment, this can lower your score. The credit issuer reports to the major bureaus about the delinquency, which results in a dip in your score. Wait, there's more! Your score may drop even more if you're 60 and 90 days late.
Furthermore, if you don't pay off these delinquencies promptly, the credit card issuing company may even forward your case to the debt collection agency. This is also recorded on the credit report and remains on it for seven years.
How To Fix It?
The best way to deal with this is to keep track of your payments. Make sure that you receive credit card payments and pay them on time. You can do this by setting important reminders on your phone or opting for automatic deductions so that you never have to worry about late payments.
High Rate of Credit Utilization
If you depend heavily on your credit card, you will likely have a high credit utilization ratio. This is yet another reason for a sudden score drop. According to experts, your credit utilization score should be lower than 30 percent. Higher than the recommended percentage depicts to the lenders that you may be financially unstable, which can backfire, especially if you wish to apply for a home mortgage or refinance your loan in the future. This ratio is primarily calculated by adding your card balance and dividing it with the credit limit.
How To Fix It?
To lower credit utilization:
●Stop swiping your card at every purchase.
●Avoid going above 30 percent.
●Hence, keep your balances below. This will help improve your score greatly.
Decreased Credit Limit
Among the top reasons for a sudden dip in the credit scores is a decreased credit limit. This is an unwelcoming event, but it happens more frequently than you think. Card issuers often lower the credit limits of cardholders for multiple reasons.
Firstly, it works like a strategy for them to mitigate risk. Remember that issuers initially set the credit line based on your current debt-to-income ratio, credit score, income, and credit history. However, if you continue to miss payments or are always late on paying off your credit card bills, the issuer may reconsider the credit line on your card and reduce it.
How to Fix It?
To increase your credit limit, you must be prompt in paying your credit card dues and show responsible financial behavior. Also, you can request the issuer to increase the limit.
Paying Off Installment Debt
If your credit score drops and you don’t understand why, reevaluate your financials. The drop may be because you paid off a student or home mortgage loan. Even though it's good news, paying off installment debt can have the opposite effect. It causes your score to drop as you have one less account in your name.
It is important to know that approximately 10 percent of the FICO score is a mix of credit. It predominantly suggests that you can smoothly manage different debt types.
Get A Free Mortgage QuoteHow to Fix It?
Though there is nothing much you can do to fix the drop in your score if it's because of the loan debt payment, simply be patient and stay positive. Don't let this reason stop you from paying loan debt promptly. This may result in a small drop temporarily but can help improve your overall financial health.
Wrapping Up
In a nutshell, there is always a reason behind a credit score drop. You may have a solid understanding of the common causes to identify the reason and do something about it quickly. Moreover, if you are a veteran struggling with a low score and want to take out a loan, consider VA loans. With this loan, you don't have to worry about a VA minimum credit score. They don't have a minimum score limit. You can easily qualify for these loans. For more information about veteran loans or home refinancing, visit Lendgo.