Are you in the habit of monitoring your credit scores? If so, good for you! The condition of your credit matters a great deal, especially if you plan on applying for a mortgage loan anytime soon. If you do not already monitor your credit reports and scores on a regular basis, it may be time to consider adding this as a habit to your monthly routine.
A drop in your credit scores generally signifies that something has changed on your credit reports and that that change has elevated your level of credit risk.
Monitoring your credit scores is important because, like your weight, those ever-so-important numbers are not static. Instead, they are prone to change any time the information contained in your credit reports changes. You might have a long track record of great credit scores and fantastic credit history in the past, but that may not protect you from a credit score decline.
A drop in your credit scores generally signifies that something has changed on your credit reports and that that change has elevated your level of credit risk. Unfortunately, the actual reason or reasons that your credit scores dropped may not always be clear to you. If you are currently scratching your head and trying to figure out what went wrong, consider these as possible explanations:
1. Late Payments
Your payment history has a big effect on your credit scores. About one-third of your FICO and VantageScore credit score points are based on factors having to do with your payment history. This means even a single late payment could potentially have an impact on your credit scores - and not in a good way. It’s always better to avoid negative information and by not missing payments on anything you are almost guaranteed to do so.
2. Increased Utilization
The second most important category of your credit reports, your debt, accounts for roughly another one-third your credit score points. Your revolving utilization ratio (the relationship between your credit card limits and the credit card balances that appear on your credit reports) is the most important factor considered within this category. If the balance on any of your most recent credit card statements has increased relative to your account limit, your credit scores could be in for a bit of a bumpy ride, at least temporarily. Furthermore, if any of your credit card issuers lowers your credit limit, this could potentially trigger an increase in your revolving utilization ratio and, by extension, a decrease in your credit scores.
3. Opening New Accounts
Opening new accounts can be another common cause for lower credit scores. I acknowledge this is a little silly. You can’t avoid opening new credit accounts. It’s called life! But just be aware that even new positive accounts could potentially cause a small decline to your scores. Credit scoring models consider the average age of the accounts that appear on your credit reports and the older, the better. If a new account or accounts has caused your average age of accounts to decrease, your credit scores might follow suit.
4. New Credit Applications and Inquiries
Did you know that merely allowing a lender to pull your credit reports could possibly damage your credit scores? The reason? There is a direct correlation between how often you apply for credit and the degree of credit risk you represent to lenders. You do not need to be afraid to apply for credit, but you should develop a habit of only allowing your credit reports to be pulled whenever truly necessary.
5. Errors or Identity Theft
There are times when your credit scores may drop due to factors outside of your control. Inaccurate information or identity theft can often result in lower credit scores. If you ever notice a sharp drop in your credit scores, your first step should be to obtain copies of all three of your credit reports and go over them from top to bottom. If you discover any incorrect information, you can alert the credit reporting agencies by filing a dispute.