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Figuring Out Why Your Credit Score Fell
There’s no doubt about it – it’s dispiriting to see your credit score drop. The reason to identify the cause is so that you’ll know how to address the problem. Some problems impact your score for years, but others can be corrected quickly to give your score a bounce. Here are the things that can depress your credit score and advice on how to fix them.
About 35% of your FICO credit score stems from your payment history. Creditors report payments that are more than 30 days late to one or more of the three major credit bureaus (Experian, TransUnion, and Equifax). That will damage your score significantly, but the problem gets much worse if your account goes into collection, is written off by the creditor, or you file for bankruptcy. These kinds of events can send your score down by more than 100 points and stay on your report for 7 to 10 years.
What you should do: Keep in mind that your score will begin to recover after a couple of years. You need to ensure you never miss another payment. Repay past-due amounts as soon as you can, even if they were written off. Before entering into bankruptcy, see if you can settle your debts by negotiating partial loan forgiveness, which is less damaging to your score.
Amount of Debt
Your credit score will suffer when your debt balloons to uncomfortable levels, as your indebtedness accounts for 30% of your FICO score. For credit card debt, the credit utilization ratio (CUR) measures the amount of credit you are using divided by the amount available. Values above 30% can hurt your credit score, whereas a reading below 20% can have a positive impact. For loans, one key statistic is debt-to-
income ratio. Most lenders want to see a DTI ratio below 50%, and mortgage lenders usually set 36% as a maximum.
What you should do: Paying down your debt can help your score rebound within a month or two. Consider consolidating your credit card balances by transferring them to a new card running an introductory 0% APR promotion on balance transfers. Ask for a credit limit increase – if granted, your CUR will decrease. You can also pay more than the required installment amount on your loans. If that’s not possible, pay half of your monthly bill every two weeks to reduce your interest costs.
Credit Report Errors
One of the quickest ways to improve your credit score is to remove inaccurate and unverifiable negative information from your credit reports. Things to look for are unrecognized accounts and unauthorized “hard” inquiries – these occur when you want to open an account and permit a creditor to look at your credit report. Each inquiry can drop your score by 5 to 10 points and hurt your score for a year. Also look for accounts and/or purchases you don’t recognize. These usually indicate that you’ve been the victim of identity theft.
What you should do: Get copies of your credit reports from the three credit bureaus and look for questionable items. You can do this on your own or you can hire a credit repair company that will do the heavy lifting for you. Dispute hard inquiries you didn’t authorize, purchases you didn’t make, payments incorrectly missing, accounts you didn’t open, and any other questionable information. The credit bureaus have procedures that require them to investigate disputed items and give you an answer within 30 days. Credit repair companies aggressively pursue questionable items and are good at having them removed, which may boost your credit score.
Age of Accounts
The ages of your credit/loan accounts influence 15% of your FICO score. Old accounts are a positive when they show you’ve been able to properly handle credit for a long time. FICO scoring looks at the age of your oldest and newest credit accounts as well as the average age of all your accounts. Closing an old account reduces average age and thus drops your credit score.
What you should do: Don’t close old credit card accounts. Instead, use each card at least once a year so that they don’t go dormant.
About 10% of your FICO score is tied to new accounts. Specifically, your score will be hurt if you open too many new credit accounts within a six-month period. Each new account requires a hard credit inquiry, which hurts your credit score. New accounts can also hurt your indebtedness ratios.
What you should do: Refrain from opening more than one account every six months. When you apply for credit products, pursue only those for which you have a good chance of approval. If you are rate-shopping for a loan, try to group your applications within a short period (30 to 45 days), because they’ll be counted together as a single hard inquiry.
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Eric Bank is a business and personal finance writer which has been featured in Credible, Wisebread, CardRates, Zacks and many other outlets. He holds an M.B.A. from New York University and an M.S. in Finance from DePaul University.