Why Your Credit Score May Suddenly Drop
- Author: William Asher
- Posted: 2024-08-21
If you are like many, you often check your credit score as you should in order to figure out where you stand as a borrower. In fact, you should do this periodically to make sure that nothing is amiss. Sometimes, you may have an unwelcome surprise when your score has taken a sudden drop. While you should definitely order a credit report to see if anything nefarious has happened, there may also be an easy answer for the sharp fall in your creditworthiness. Many of these occurrences are avoidable, but some are not. Here are some reasons why your credit score may suddenly fall.
You Closed a Credit Account
Your credit score has a number of different ingredients that go into the computation. One of these is your previous credit history. When you have opened credit accounts and made the payments on them, you show lenders that you have a track record of making good on your debts. This makes them more likely to want to lend you money.
However, there are some occasions when you may no longer need that credit. For example, you could have paid off an auto loan and closed the account. While this is a good thing because you no longer owe the money, it can also affect your credit for the worse. Here, you lose the benefit of an account that was a part of your credit history. The same thing holds true when you close a credit card.
You Recently Made a Large Charge
Another element of your credit score is your credit utilization ratio. Lenders do not want to see that you are "tapped out" when it comes to credit. If you make a large purchase and charge it to your credit card, it causes your credit utilization ratio to spike. When this happens suddenly, it sends up a danger sign to creditors.
The real problem for your credit score happens when your credit utilization goes above 30%. If this happens suddenly, it could cause a large drop in your score. If you can pay the charge before the billing cycle ends, there will be no impact. The drop happens when you end the billing cycle with the large charge on your account.
You Have Applied for Several New Loans
When one is shopping around for new credit, they need to be careful with how far they go during the process. If possible, they want to limit the potential lender's level of engagement with their credit history to a "soft pull." This is something short of a full credit check that many users will rely on to pre-approve you for credit. When you have had a full credit check, it is a "hard pull." When you have too many of these occurring, it drops your score. There is a temporary effect on your score of a few points. If you have many hard pulls at once, there will be a larger drop. Thus, you should limit the number of full applications that you should make.
You Have an Account in Deferment
Right now, you may be one of the many people who have been affected by COVID-19. You may have spoken to one or more of your lenders who have placed your account in deferment status. While this keeps you from being hounded by debt collectors, it is still not good for your credit score. While there is no direct effect, the age and the size of the credit may increase. These are negative factors in your score.
You Have Missed a Credit Payment
Perhaps the worst thing for your credit is missing a payment. Even if you simply forgot to pay the bill one month, the effect is still the same. Even being late on a payment by 30 days can drop your credit score by a minimum of nearly 20 points. If you previously had great credit, a missed payment can drop you to average credit. The longer you go without paying the bill, the more your score drops.
Your payment history is the single most important ingredient of your credit score. It is more than one-third of your credit score. Lenders want to see that you pay the money back. If you have a 90-day missed payment or more than one late payment, it will be evidence of a bad pattern and will set your credit back a long way.
