A good credit score is necessary if one is to be approved for loans, credit cards, and other forms of credit at reasonable interest rates. Hence, if you notice that your credit score has gone down, then it will most definitely cause concern and make you wonder why this is so even though you have always been a responsible billpayer. Here are some reasons why your credit score may have dropped even though you pay everything on time: Here are some reasons why your credit score may have dropped even though you pay everything on time:
Your total credit utilization went up This is one of the most frequent practices that contribute to credit score reduction even if one pays on time. The credit utilization ratio is the total of your credit card balances and loans divided by the total amount of credit available to you. It is advised that the credit that you use should be less than 30% of your entire credit limit.
If you have recently applied for some credit or spent a lot recently e. g. charged a large bill on a credit card or taken a new loan, then your utilization ratio would be higher. This is an indication of higher risk to the lenders hence they may pull down your score. Once the balances are paid down again, your score should return to normal, or wherever it was before you started racking up the debt again.
You did the following: You have opened a new credit card Applying for a new credit card reduces your credit score in the initial period of usage which varies from 6-12 months. This is because lenders get worried when they observe multiple new accounts or hard inquiries within a certain period.
However, if the card is managed responsibly such that one does not incur large balances and pays on time the effects are often short-lived. In the long run, it will be to your advantage to have an additional open and active account for your credit score to be higher.
Your available credit decreases Whenever a credit card company with which you already have an account reduces your credit limit, your credit utilization ratio increases since you are expected to owe a larger proportion of your credit limit. This can reduce your score.
Sometimes issuers reduce limits evenly during an economic crisis. It can also be caused by exceeding the credit limit on a card, or missing payments, which indicates higher risk. In case this happens, one should try to request a higher limit after rectifying the problems that led to the reduction.
An account closure or a default is still listed in the credit report. Collection accounts and late payments are listed on your credit report, which has a seven-year lifespan. However, even after they are paid up, they remain in your file and keep pulling down your score. The same applies to default or a foreclosure that has occurred in the past.
Also, occasionally, when one of the credit card accounts you use has been inactive for quite some time, a lender may decide to shut it down, which contributes to the shortening of your credit history line and a subsequent drop in the score.
The only way to recover from such items is to acquire new positive credit over some time. Finally, the negative items will be wiped out from the report and will cease to bring the score down. Yet, this process could take several years.
You checked your credit score through a provider with incomplete information
It is imperative to understand that not all free credit score services offer comprehensive details on your credit rating. For instance, some might provide you with a VantageScore and not the FICO score, or they may not include data from all the credit bureaus.
Third parties may offer different scores and reports since lenders mainly use FICO scores and data from full credit reports. To get the most accurate score get your complete reports once a year and to get your FICO score use myFICO or a website like Credit Karma.
There is something wrong with the credit report as there are accounts that are not authorized.
Sometimes your credit score decreases because there are entries in your credit report that may be a mistake, such as late payments that are not yours, loans that are not yours, or other entries that you do not recognize as belonging to you.
Most individuals discover items on their reports resulting from identity theft and credit reporting mistakes. Do not accept the misinformation and challenge it immediately by submitting a complaint to each credit bureau’s dispute division. This can most often help to overcome the problem so your score rises.
Also, the following may help you to protect yourself from scammers by putting a freeze on your credit reports to prevent the creation of any accounts that you did not authorize.
The Bottom Line
This can be worrying especially if you have noticed a sudden change in your credit score downwards. However, in most cases, one can work on the problem areas and bring the scores back on the right trend again. Avoid missing any of your payments, maintain your credit card utilization below 30% of your credit limits, avoid applying for credit frequently, and review your credit reports from the three major credit reporting agencies regularly to ensure that errors are not dragging your score down. Stay consistent with good behavior, and your credit standing will improve over the long term.
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