Why did my credit score drop by 100 points? Top 10 reasons
Table of Contents
Avoiding a few mistakes can put you way ahead of the game and help you to improve your credit score in the long run. If your score is going down then you should figure out what happened to your score. You must check the following reason immediately which we are going to discuss next.
- Your FICO score factors
- Effects of late payment on your score
- How does collection affect your score
- When Charge off play the game
- Hard inquires may affect your Score
- Not paying your bill on time
- Not keeping your “old” credit cards or old accounts
- Not Pay off your High Interest and “New” Credit Accounts First
- Lack of Accounts Diversity
- Derogatory Mark
- An Error from Data Furnisher
- Identity Theft
Why it is so important to stop decreasing your credit score immediately
If your FICO score is high then the possibility is you will get the approval of your loan or credit card easily with a much-reduced interest rate. Your lifestyle became so easy. You will get the freedom of credit and enjoy life as per your wish. However, there is another possibility of just the opposite of this if your credit score is not good.
There are many reasons your credit score may drop, next, we will discuss why did my credit score drop and how to protect it from decreasing. If your FICO score is low then the door to your happiness is close all around you and your world is only getting smaller every day. You will never get your dream house, even not in your lifetime. It also restricts you to access a product or services offered by the bank or other financial institutions.
Why is my Credit score going down – The major factors
Your FICO score can be split into a few major factors like payment history (35%), Debt Burden (30%), Length of History (15%), Types of Credit (10%), and Recent Credit Searches (10%). I will discuss how these factors affect your credit score. The bulk of your credit score is made up of on-time payments and how much available credit you have. If you pay all your dues, credit accounts, and loans on time each month then you are in a good position.
“Payment history as a record of all the things you did wrong related to your credit”
You can consider payment history as a record of all the things you did wrong related to your credit and how you behave toward your debts. You did not get any boost to your credit score when you pay on time but you will get a negative mark if you not doing so. A negative history mark indicates that you have faced difficulty in meeting the debt obligation or you have a risky attitude towards your credit. Both things give signals to the lender to take more cautious regarding financial activities in the future.
The length of your credit history contributes 15 percent of your FICO score. Normally it takes six months of payment history to establish a credit score. In general, the longer the history, the more effect on the score. Later in this blog, I discussed a few powerful tricks to protect your credit history and credit utilization piece of your credit score.
Effects of late payment on your score
Late payments are directly related to payment history. It is the most common thing among consumers and it creates a tremendous effect on your credit score. Suppose you make a thousand-dollar payment for various credit cards but you forget to make a payment of $50 for a single credit card. It will hurt your credit score dramatically. The longer time you are late for the payment, the more effect on your score.
“A single late payment could have a significant effect on your credit score”
If you hold a higher credit score. According to the FICO data, a 30-day late payment could hurt you as much as a 90 to 110 points drop in your FICO credit score. Provided that you are an initial score of more than 780 and you never missed a payment on a credit card.
For example, a consumer with only two late payments history and an existing 680 FICO score could drop 60 to 80 points in his score after being hit with a fresh 30-day late payment on any of his credit accounts. (one is two years ago a 90-day late payment on a credit card account and the second one is approximately one year ago a 30 days late payment on an auto loan account)
Why did my credit score drop for no reason?
Sometimes you may be surprised by why did my credit score drop for no reason. It may be something from years ago like an old cable bill that you missed when you moved. That happened to me when I received a collection notice for $156 for an old Comcast bill from a house I’d moved from several years ago and didn’t even know about it.
Collection Account on your Report
If you fail to pay your debt before the 90 days late payment period then your debt is sold to a third-party collection agency or internal collection department. It will be updated in your credits reports and your score will suffer. Are you thinking about the collection may affect your credit score? Do not worry, we can help you in this regard and you can bring back your credit point.
How much does a collection affect credit score?
That one collection notice on my report was driving my score down by maybe 100 points. That was an honest mistake. Every time when you see a collection account on your credit report, you feel uncomfortable thinking that this account has a negative effect on your credit score. You will see this account in your credit report each time a collection agency reports debts to credit bureaus. Thus, these affect your credit score negatively.
However, there are some ways to get the thing sorted out. And you should always try to stay on top of all three credit reporting agencies. To avoid damages to your credit score by the collecting account keep reading, the next section we talk all about these.
“What to do When Charge off has a highly negative impact on your score”
A creditor will charge off your account after 180 days of no payments when you do not pay anything to debt. A charge-off has a highly negative impact on your score. It stays on your report for 7 years from the date it missed the payments. The creditor often uses a third-party debt collector to attempt to collect payment after an account has been charged off.
The original creditor may hold the account but assign it to a third party for collection. In this case, the original charge off with the balance will be reported. However, a new collection account will report to your credit file if the creditor sells the debt.
“Solve the problem with the original creditor before they sell the debt”
Now you have two major negative items on the same debt, a charge-off, and a collection. It is a good idea to solve the problem with the original creditor before they sell the debt and the collection account shows up. The first collection can cost you 100 points negative if your credit score is in the 700s.
If you have lower scores and other negatives. Then the new collection has less effect on your credit score. But it is still significant. So it’s a good idea to take care of things that affect the credit score. Since FICO, algorithms are extremely complex and the details of how they work are kept highly secret, we cannot describe exactly how many points your score will drop due to a charge-off or a collection.
Hard inquires may affect your Score
Applying for new credit may have an effect on your credit score but depends on each person’s credit history. In general, there is very less effect on your FICO score. One additional credit inquiry (hard) may result in five negative points in your score. Why would my credit score drop when I did not do anything to my credit?
Hard inquiries are those, generated when you apply for new credit and your lender request for your credit to a credit bureau. Even if your credit score changes by inquiry, it will list factors that affect your credit score. So, from time to time, you need to monitor your credit score.
“Inquiries from potential creditors consider against you”
Therefore, your own request does not have any impact on your score. But you should always try to stay on top of all three credit reporting agencies. Do not apply randomly for your credit cards. Before applying to do your homework, Compare rates, terms, and features offered by the lenders and then only apply. It is not just you, and it’s not your fault. It happens to all of us. One study showed over 34% of Americans had 620 or lower “Bad Credit” scores. Maybe they had a health issue, maybe they were in between jobs.
Manage and use your credit responsibly to stop decreasing your credit score
Having that said, the most important is how you manage and use your credit responsibly. You should never be late to pay your credit card bill. Use the online payment option to manage and set your bill payment automatically. Always spend less than you earn. For this, you need a budget that you should follow strictly. If you fail to follow then your score will decrease drastically.
Optimize your debt ratio – do it without really having to change your spending behavior
Now we get to the fun part, where I’ll teach you the magic number credit agencies really want you to carry in debt and why.
Your FICO credit score is calculated using the following formula:
35 percent payment history
30 percent amount owed
15 percent length of history
10 percent new credit
10 percent types of credit
This means the bulk of your credit score is made up of on-time payments and how much available credit you have. Obviously paying your bills on time will improve your credit history over time, so we’ll focus on the debt-to-credit ratio.
Pre-Due Date Payments – a trick to boost the credit utilization
One trick to boost the credit utilization piece of your score without really having to change your spending behavior is to pay your bill approximately 10 days before your due date.
Monthly Spend: $500
Credit Limit: $1065
Due: 25th of each month
Monthly Spend Paid On Due Date (25th of the month): 53% Utilization
Monthly Spend Paid 10 Days Pre-Due Date (15th of the month): 6% Utilization
Credit Utilization Formula: Credit Used / Total Credit
Credit Bumpers – Trick to Protect History – Cushion the Blow
Just one late payment that happened years ago, maybe when you were back in college, could significantly impact your score today. One trick to absorb some of the impacts of a negative on your Credit History is to use Credit Bumpers by adding more Accounts to your total number of Open Accounts. This example shows how much faster you recover from one late payment when you have 5 open accounts instead of just one.
1 Account with 1 Missed Payment:
Year 1: 11 On-Time / 12 Total = 91.67% Very Poor
Year 2: 23 On-Time / 24 Total = 95.83% Very Poor
Year 3: 35 On-Time / 36 Total = 97.22% Poor
Year 4: 47 On-Time / 48 Total = 97.92% Poor
Year 5: 59 On-Time / 60 Total = 98.33% Fair
5 Accounts with 1 Missed Payment:
Year 1: 59 On-Time / 60 Total = 98.33% Fair
Year 2: 119 On-Time / 120 Total = 99.17% Good
Year 3: 179 On-Time / 180 Total = 99.44% Good
Year 4: 239 On-Time / 240 Total = 99.58% Excellent
Year 5: 299 On-Time / 300 Total = 99.67% Excellent
Credit History Formula: On-Time Payments / Total Number of Payments
Maintaining low balances on Credit cards can raise your score by up to 100 points
Pro tips: Many experts will tell you to stick to 30 percent of your available credit. This means if you have $1000 of credit, you should only have balances totaling $300.The truth is the more available credit you have, the better your score will be. Maintaining low balances on credit cards can raise your score by up to 100 points.
I recommend keeping your available credit at 94 percent. So does Experian. I checked my own credit report one day and that’s the advice they gave me to raise my own credit score. You should only be spending $6 for every $100 of available credit you have to successfully raise your credit to the best possible score.
What this shows creditors is that if something bad happens in your life (medical emergency, job loss, etc.), you still have access to funds to pay your bills for the next six months. This lowers your credit risk and makes you someone lenders love to work with.
Use your credit card Enough while maintaining enough available credit – Powerful Trick
Only spending six percent of your available credit makes it difficult to gain credit increases from your credit card companies. They’re not going to raise your limits on a card you never use. So, I use this powerful life hack to boost my credit score into the stratosphere, and you can have massive success with it too! What I do is charge and maintain a high balance on each card for two months. In the third month, I pay it all off and let it sit for two months.
This way, I’m using my credit card enough for the bank to continue raising my limit (thus raising my available credit) while maintaining enough available credit to keep the credit agencies happy. Master this method, and you’ll notice your score go within months. And there are a few more insider loopholes to instantly transform your life. All these tricks have the tremendous potential to increase your credit score that is already been proven.
Credit Card you should Avoid
Our customer Brian couldn’t understand why his credit was so bad. He seemed to be doing everything right – he paid off all his old debts and avoided credit cards. Credit cards are necessary to maintain a healthy credit score though. But not all credit cards are created equal, and they can affect your credit score in different ways.
Before applying for credit cards to raise your credit score, it’s important to understand how they truly impact your FICO rating. When discussing credit limits, we’re only talking about normal credit cards, which are called revolving lines of credit. This means if you have a $1000 limit and a $600 balance, you can still spend $400.
“Secured credit cards act more like installment loans on your credit report”
Secured credit cards (which are prepaid) and store credit cards act more like installment loans on your credit report. This means if you have a $1000 limit and a $600 balance, it still shows on your credit report as a $1000 loan with no available credit. Avoid cards with high fees and bad customer service. Last year, the worst credit cards include First PREMIER Bank Gold Credit Card, Bancorp South Gold Master card, and Arvest Bank Visa Classic Card. These cards may hurt your credit rating more than they help.