Even though you pay the same bills, have the same number of loans, and are always responsible with your credit cards, your credit score fluctuates from month to month. It may appear that your credit score fluctuates like the seasons, even if you appear to have done nothing to influence it.
This article will go over the factors that can affect your credit and explain why it may have dropped for no apparent reason.
Why Your Credit Score Matters
Lenders use credit scores to determine how likely you are to repay a loan you borrow. It’s especially important when looking to buy a home, and it plays a significant role in determining your loan rates and terms.
Your credit score is calculated based on your payment history, the amount you owe, the length of your credit history, the type of credit you have, and new credit added, so a change in your score indicates that one of these factors has changed.
Why Did My Credit Score Go Down When Nothing Changed?
Sometimes your score changes due to factors beyond your control, but most of the time your behaviour influences your score in subtle ways.
Let’s look at the factors that influence your score and why it might change even if you don’t believe you’ve changed your behaviour.
Your Credit Utilization Has Changed
The credit utilization ratio is the amount owed on your credit card in comparison to the credit limit. It has an impact on your credit score, so a change in either of them can cause your score to fluctuate.
Have you recently charged more on your credit card? If this is the case, your credit utilization may have increased, which can have a negative impact on your credit score. Typically, credit utilization of less than 30% (i.e., spending $300 or less if your credit limit is $1,000) can keep your credit in good shape.
Check to see if your credit card company has changed your total limit. Credit card companies will often tell you if you are eligible for a credit limit increase, but they may change it without your knowledge. If your spending habits remained unchanged, increasing your credit limit would lower your credit utilization ratio, which can improve your credit score. A reduction in your credit limit would increase your utilization ratio, potentially lowering your credit score.
Something Was Recorded On Your Credit Report
Consider your payment history: have you missed any credit card payments in the last few months? Were there any bills you forgot about in previous months?
Missed payments are typically not reported to credit bureaus until they are at least 30 days late, so your credit score will not be affected until after that point. A payment that is more than 30 days late will lower your score, but delinquency, defined as a payment that is more than 30 days late, can destroy your score.
Tax liens, charge-offs, collections, foreclosures, or bankruptcies all have a negative impact on your credit and can take weeks or months to appear on your report. If you’ve had any of these, it may take some time for your score to improve.
Something Fell Off Your Credit Report
Missed payments and negative marks on your credit report, thankfully, do not last forever. The older the marks on your credit score, the less impact they have, so your score may recover over time if your behaviour remains consistent.
Late payments of more than 30 days will stay on your credit report for seven years, while derogatory marks such as bankruptcy can stay on your report for up to ten years. Your credit score will improve over time, and once these marks are removed from your credit report, you may see an immediate increase in your score.
There Has Been A Recent Inquiry On Your Report
If you’ve recently applied for a credit card or loan, your credit report has most likely been pulled. This is a hard inquiry, which occurs when a lender checks your credit to see if they want to lend you money. These will reduce your score temporarily.
An Account Has Closed
When you pay off a loan, your credit score may suffer as a result. This is because your credit history is shortened, and age of your accounts for roughly 10% of your credit score. If you’ve recently paid off a loan, your credit score may be dropping right now.
A closed credit card may also have a negative impact on your credit score. Not only is your credit history shortened, but your credit limit and credit utilization ratio are also affected.
You are often the one who authorizes the closure of a credit card, but card companies can close them without your knowledge. The Equal Credit Opportunity Act (ECOA) allows creditors to close a card without notice due to inactivity, delinquency, or default. If they close an account for any other reason, they are only required to give you 30 days’ notice after closing the account, so you may have a closed credit card that you are unaware of.
Should You Worry About Your Credit Score Dropping?
Changes in your credit score are completely normal, so don’t be concerned about minor fluctuations! That being said, it’s a good idea to check your credit report at least once a month so you can track any changes that occur.
Large changes in your score should be noted because they could be an indication of something more serious – for example if you have unauthorized accounts opened in your name or have been a victim of identity theft.
What To Consider When Your Credit Score Changes
The next time your credit score changes, ask yourself the following questions:
- Have you spent more or less money this month compared to previous months? If so, your credit utilization ratio may have changed.
- Did you miss a payment in the past few months? If so, you could have a delinquent payment that’s hurting your score.
- Did a missed payment or derogatory mark from several years ago fall off your credit report? If so, your credit score may be going up.
- Have you applied for credit? An inquiry may have been placed on your report, which can negatively impact it.
- Have you recently paid off a loan or closed a credit card? If so, your credit history may have been impacted.
If you look closely, you may discover that something has changed that could affect the credit score that you were previously unaware of. The best way to track changes in your credit score is to check your credit report monthly, so you’re aware of all changes that affect your score.
