Why Did My Credit Score Drop?

By: Dr. Owusu Kizito

The following guidelines will assist you in maintaining a strong credit report and avoid a hit on your credit score:
1. Open Credit Card Utilization
Carrying a significant amount of debt on your credit cards could be one reason why your score dropped. Your credit card utilization rate is a snapshot of the total debt you have on your credit cards divided by your total credit limit. If you’re relying too much on credit, a lender could view that as a bad sign.
Possible Solution: You can try paying down debt, taking on less debt in the future or increasing your available credit on your credit cards by requesting a credit limit increase from your card issuer. Additionally, if you have been paying your credit cards responsibly, consider opening a new credit card, which will also increase your total available credit. All of these actions will effectively lower your credit utilization rate. You can also check on your current utilization by connecting your financial accounts.

2. Percent of On-Time Payments
Since creditors are trying to judge how likely you are to pay back your debt, reliability is important to them. If you miss even a single payment, your score could take a hit. The relative impact could be especially high if you’ve never missed a payment before.
Possible Solution: If you’re not sure which payment you missed, open up your full credit reports. Click on the “Accounts” tab, and expand each account to see your 48-month payment history.
Moving forward, you can set up an automatic withdrawal from your bank account, or link your financial accounts and turn on bill reminders to help avoid missing any future payments. Continue monitoring your credit report as well to ensure all of your future payments are being reported as on-time.

3. Number of Derogatory Marks
If you experienced a major drop in your credit score, a derogatory mark could be to blame. Tax liens, accounts going into collections and bankruptcies are among the most serious things that can happen to your credit score. Since they represent major delinquencies, they can reflect poorly on your ability to take care of your finances.
Possible Solution: Check your free TransUnion and Equifax credit reports at Credit Karma to investigate whether these derogatory marks actually belong on your report. If you find that these marks are errors, you always have the option to file a dispute.

4. Average Age of Open Credit Lines
The longer you have had credit accounts open, the more creditworthy you generally appear to lenders. If you’ve closed an account recently, some scoring models won’t factor in your closed account when determining your credit age, so your credit history may appear shortened and your score might drop.Opening a new account could also lower the average age of your accounts.
Possible Solution: Before opening or closing an account, use Credit Karma’s Credit Simulator to see how the action could potentially affect your score, and be prepared for a change when you pay off a loan. If you’re not sure if you need to close an account, consider the pros and cons of doing so.
5. Total Accounts
While it’s not the most important part of your credit score, having a good mix of different types of creditand an appropriate number of open accounts shows lenders that you have the experience to pay off debt responsibly. If you’ve just paid off the only loan you have, your credit mix might look a little less diverse to lenders. Similarly, if your total number of accounts suddenly skyrockets or nosedives, that could indicate that you’re financially strapped and need credit or can’t afford your existing credit accounts.
Possible Solution: Before you open or close any accounts, you may want to check your credit report’s “Overview” tab, where you can see the distribution of your open and closed accounts. Doing so will help you be aware of where you stand. If you’re thinking about opening up new credit cards, don’t fall for every offer out there – only open ones that you need.

6. Hard Credit Inquiries
Generally when you apply for a new form of credit, whether it’s a credit card, an auto loan or a mortgage, a hard inquiry is placed on your credit report. Normally, a single inquiry would initially only drop a few points off of your score. However, if you have applied for several accounts in a short period of time, you could appear desperate for credit and the damage from those hard inquiries might add up.
With that said, some scoring models (but not all) allow for rate shopping on auto or home loans without any additional damage.
Possible Solution: To avoid unnecessary inquiries, only apply for credit when you need (and can afford) it, and try to focus on cards that you have a good chance of getting approved for. Credit Karma shows you your estimated Approval Odds before you apply, so you can make a more informed decision.
If you’re looking for a loan and need to rate shop, consider looking through consumer reviews to narrow down your choices. You can also consider getting pre-qualified or pre-approved for credit, so you have a better sense of what you’ll be approved for before you apply. By doing your homework, you may be able do avoid unnecessary hard inquiries.

Credit scores often seem like they’re shrouded in a veil of mystery. Now that you know what might have brought down your credit score, try your best to keep an eye on your credit health. Even though these situations can’t always be avoided, understanding their impact could help you make more informed decisions.

Five Steps Toward Healthy Credit

1. Be punctual

Pay all your bills on time each month. Late payments, collections and bankruptcies can have a significant negative effect on your credit health. If you need some help with this, consider trying out some of these strategies.

2. Check your reports
Check your credit report regularly and take the necessary steps to remove inaccuracies. Don’t let your credit health suffer due to inaccurate information. If you find an inaccuracy on your credit report, contact the creditor associated with the account or the credit reporting agencies to correct it.

3. Manage your debts
It’s generally recommended to keep your credit card account balances below 30 percent of your available credit limits. For instance, if you have a credit card with a $1,000 limit, you should try to keep the balance owed below $350.

4. Give yourself time
Time is one of the most significant factors that can build healthy credit. Establish a long history of paying your bills on time and using credit responsibly. You may also want to keep the oldest account on your credit report open in order to lengthen your period of active credit use.

5. Avoid excessive inquiries
A large number of inquiries incurred over a short period of time may be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties or overextending yourself by taking on more debt than you can easily repay. Apply for new credit in moderation and thoroughly research your options before you apply.
Sponsored by: TransUnion

Quick Tips for Improving Your Credit Health
Task: Ask for a higher credit limit.
Possible benefit: Could lower your credit card utilization.
Approximate Time: 10 minutes
Tactic: Most credit card companies periodically review credit limits, but if it’s been a while since you’ve received a credit limit increase and you have an excellent record, you could try requesting one. Calling up your credit card company might seem like a daunting task, but if it could help your credit health, why not give it a shot?
First, find your creditor’s phone number on your latest statement, on the back of your card or by searching online. Explain to the customer service representative your reasons for requesting an increase. You’ll likely need to provide additional personal information, like your income and employment status, to start the application process. If a phone conversation feels too intimidating, check if you may be able to request an increase through your online account or by visiting your local branch.
Watch out for: Sometimes, credit limit increase requests can come with a new hard inquiry of your credit report, which could initially have a negative impact your score. Make sure to ask first if this will happen so that you know what to expect and can decide if you’d still like to go through with your request.

Task: Write a “goodwill adjustment letter” for a past late payment.
Possible benefit: May remove a late payment from an otherwise good-looking credit report.
Approximate Time: 15 minutes
Tactic: If you’ve recently made a late bill payment when you’re ordinarily on top of things, you could try asking to have that one black mark removed. In your letter, make a case for why the delinquency should be removed. Generally, you should describe briefly what happened, show what a loyal customer you’ve been and point to your positive track record before and after the misstep. You could model your letter after this example (make sure to personalize!) and wait about 30 days before following up, if you haven’t heard anything.
Watch out for: Remember that your credit card company or lender doesn’t have to remove the delinquency, so be prepared to wait until it eventually falls off of your report.

Task: Make a plan to pay down your credit card debt at a faster rate.
Possible benefit: Could lower your credit card utilization and reduce interest fees.
Approximate Time: 30 minutes to an hour to plan
Tactic: If you tend to carry balances on your credit cards from month to month, consider working out a plan to pay down your debts faster so you can get your credit card utilization rate to lower than 30 percent (the rate that credit experts generally recommend you stay under).
You can easily check your credit card utilization rate on Credit Karma to see where you stand. Work on the cards reporting more than 30 percent first. If you’ve only been making the minimum payments on those cards and are able to afford it, it’s a good idea to increase your payment amounts so you can steadily decrease your utilization rate. If you can pay your whole bill amount, then you can avoid interest charges as well. You can track your spending habits by connecting your online accounts through Credit Karma.
Watch out for: While you’re working on lowering your balances, try not to rely too heavily on your credit cards if possible. Otherwise, you could end up reversing all of your hard repayment work with new spending.

Task: Transfer your credit card balances.
Possible benefit: May strengthen your debt pay-off plan and increase your total number of accounts.
Approximate Time: 15 minutes to apply (then 7 to 10 days if approved, typically)
Tactic: When you have lots of different credit cards with varying balances to pay off, making multiple payments each month can seem tricky. There are several cards that offer introductory balance transfer rates, meaning if you transfer all or some of your other cards’ balances, you’ll pay little or no interest on those transferred balances for an introductory period (often a year or two). These promotions vary by card and usually come with a one-time fee, so always review the terms carefully. If you’re interested in opening a balance transfer card, you could start by reading member reviews on Credit Karma.
Watch out for: In most cases, if you don’t pay off your balance transfer completely during the introductory period, you’ll have to pay interest on the entire transferred amount when that period is up. So this tactic is generally good for you only if you’re really ready to pay off your credit card debt during the introductory period.

Task: Dispute credit report errors.
Possible benefit: Should result in a more accurate record of your credit history.
Approximate Time: 1 hour to prepare a dispute request (then usually up to 30 days)
Tactic: While some credit report errors don’t affect your credit score at all (like inaccuracies in your personal information), others could severely impact your ability to get approved for credit (like inaccurately reported derogatory marks). Cleaning up errors from your credit report should be a top priority. Check out this step-by-step guide to help you through the process of addressing inaccuracies in your reports.
Watch out for: While some credit repair companies will tell you they can remove all negative information from your credit report through this process, that’s often not the case. Accurate negative items on your report cannot typically be removed. Before you hire a company to help you dispute your credit report errors, read through these resources from the Consumer Financial Protection Bureau and the Federal Trade Commission.
Bottom Line
In a world of instant gratification, it’s natural to want a better credit score right now. Unfortunately, that’s not how credit scores work. Your scores depict an overall picture of your financial health and habits, and it takes time to prove your discipline. Stay patient, and you may move up the credit ladder over time.

Dr. Kizito the President and CEO of Investigroup Companies and a Tax Expert holds an MBA from Hawaii Pacific University and postgraduate law certifications from Harvard University. Dr. Kizito can be reached directly on (908) 977-7320 or email him at okizito@investigroup.org. Follow him on twitter for updates @okizito1.
Office Address: 3915 Main Street #202 Flushing NY 11355

Posted by on Jun 17 2015. Filed under Community News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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