I’ve seen friends find out their credit score dip right when they are planning to take out a mortgage for their first home. Your recent dip in credit score might come as an unwelcome surprise, but it happens quite often. This especially happens when you haven’t been regularly reviewing your credit score.
7 reasons why Your Credit Score Went Down
Your credit score going down could be because of any of these reasons:
You missed credit card payments
Credit card payment is due almost every month. When you fail to pay your dues at the end of the month, your credit card company makes a record of this.
Missing one month’s payment doesn’t really affect your credit score. But if you have missed out paying your credit bills for three months, this could be a problem. To avoid this, set your credit card payments on automatic. Or put up reminders to pay up on time.
Your company is recording your payment history every 30, 60 or 90 days. Different companies have different times to record payments. You should ask your credit card company their policy regarding this.
High Credit Utilization
Your credit card limit might be one lakh rupees, but that doesn’t mean you take out the entire one lakh. That’s what we call maxing out the credit card. Don’t utilize your entire credit limit. A good idea is to keep the withdrawal amount to less than 30% of your limit. This means if your limit is one lakh, then don’t take out more than 30,000 rupees if you want a good credit score.
High credit utilization sends off a warning to your credit company. They don’t trust people who take out too much credit because your limit is calculated based on your salary. People who take out more than the 30% limit often have problems paying off their bills later on.
If you have taken out too much credit, then we recommend paying off your bills as quickly as you can.
Applying for a new loan
Have you applied for a new loan recently? A car loan or a personal loan? If yes, this will impact your credit score. But it’s not something you should be worrying about excessively.
Unless you have applied for multiple loans in the last few months, it’s not a big deal. New loan applications make up 10% of your credit score and they end up being removed from your record after a year.
You Closed a Credit Card
Your loan history, including your credit card history, ends up being recorded in your credit score. If you have been maintaining a positive credit payment history, it reflects well on you. This means that it is actually bringing up your credit score.
Don’t make the mistake of removing reports of your old loans. Even if it’s a credit card. If you aren’t planning on using the credit card, simply don’t use it. Pay off all your dues and put it in the back of your dresser.
An unpaid bill was sent to collection
Most people don’t know but your utility bills also form a part of your credit score. You should pay your electricity, gas and water bills on time. If you have been avoiding paying these bills for more than a few months, your utility company will send them to a collection agency. This then ends up in your credit history which means a drop in your credit score.
Your Credit Limit was lowered
When your credit card company marks you as a red flag, based on one or the above actions, the next step is taken is lowering your credit card limit. They don’t want to risk offering you high credit, fearing that you are not in a position to return it. This leads to a good drop in your credit score.
On the other hand, if you are in good standing with your bank, you can request a higher credit limit. You can do that after the first two or three months of getting a credit card. We often recommend going for this since it means a lower chance of maxing your credit limit and remaining within the good 30% credit utilization ratio.
You paid your big mortgage loan
This might seem a bit surprising but after paying off a big loan, your credit score drops sometimes. That happens because your other loans are brought forward. If there has been late payments or collections in these accounts, this puts your credit score a few points down.
Remember, a credit score is not permanent. You can bring up your credit score within a few months using good financial moves. You should be talking to a good credit repair company to do this properly. Click here to read more on the best credit repair companies.