Manage Money

Credit Score Dropped for No Reason

Finances can sometimes be quite tricky.

I have always been particularly keen on keeping an eye on my finances - I have never missed a payment, my accounts are in good shape, and I always keep my credit utilization within 30%. One fine day, I logged into my mymoneykarma account to proudly congratulate myself on my wonderful credit score, but my jaw dropped; there had been stark drop in my credit score.

Why Did My Credit Score Drop?

There can be a few surprising but very pertinent reasons for a sudden fall in your credit score. Let us dig deep into them.

Old and Inactive Accounts

Have you ever found an interesting promotional offer in a shopping mall or a retail outlet and applied for a credit card? Well, I did at some point in time. And being my ever-forgetful self, I had conveniently forgotten about it.

An inactive account is of no profit to a lender, they can automatically cancel your card without giving you notice. Also, there’s no standard law to decide on how long your account needs to be inactive for before the lender can automatically deactivate it.

The solution to this problem? Well, I have learned my lesson, and so I have set up my internet bill to be auto-deducted every month from another one of my long-forgotten credit cards. You could do the same. Remember to set up auto-pay so that you don’t miss a single payment.

A New Hard Inquiry

My mobile phone connection was pathetic, and I had decided to switch over to a different teleservice provider. A gentleman from the new phone company visited my house to get all the paperwork done. There were a handful of forms to be filled, read, and signed. As I was running late, I had blindly signed wherever the person asked me to. Unknowingly, I had permitted the company to conduct a credit check to ensure that I have the financial capability to afford their services. In short, a hard inquiry was made without my knowledge.

Although you haven’t applied for a loan or a credit card recently, you might have undergone similar minor changes in your lifestyle that resulted in a hard inquiry. You might have inadvertently permitted your internet service provider, cable company, teleservice provider, and even your landlord to conduct a hard inquiry on your credit report. Upgrading your credit card or applying for an increase in credit limit can also result in a hard inquiry.

The solution to this problem? I have become super vigilant. Now I read documents before signing on them; additionally, I always ask a service provider or a lender if the transaction involves a hard inquiry. I keep a close eye on my mymoneykarma account and ensure that all hard inquiries are made with my permission. If you find an unauthorized hard inquiry, it could be fraudulent activity, and you must take action immediately.

Paying off a Loan

This one was my strangest finding. That feeling of satisfaction and relaxation when you finally settle a loan isn’t relaxation in the financial world. You need to have a variety of accounts for maintaining a good credit score. If you pay off a loan, the loan account is closed, and you lose an account. Your credit score drops inevitably.

It is better to have different types of accounts running. Keep a mix of credit accounts and loans if you want to maintain a consistent record of credit score. It indicates that you responsibly manage your finances. Lenders thus consider you to be a creditworthy candidate.

The solution to this problem? Well, it is not a great worry. Paying off a loan might reduce your credit score at the moment, but it also proves that you’re capable of repaying loans and makes it easier to get approval for loans in the future.

Being an Authorized User of a Delinquent Account

A few years ago, my grandfather had added me as an authorized user(second account holder) of one of his accounts to help me build my credit score. Unfortunately, my old and forgetful grandfather missed a payment. Since I am an authorized user, credit bureaus include that account in my credit report although I never actually use it.

There can be ups and downs of being an authorized user. If the primary account holder pays the bills responsibly, you benefit from the account. If the account holder misses payments, it brings down your credit score as well.

A solution to this problem? You could consider getting yourself removed from the account in case the account holder is a major payment defaulter. However, if the concerned account is your oldest account as per your credit report, removing it can reduce your credit score considerably. Think well before taking a step.

Being an Authorized User of a Delinquent Account

High Impact Factors

Here are three of the most important aspects that influence your credit score:

  1. Credit card utilization: How much should you borrow through your credit cards? Experts recommend that you shouldn't exceed 30% of your available credit limit. A low rate of credit utilization indicates that you spend responsibly. It also suggests that you are more likely to repay the loan on time. Additionally, keeping a substantial buffer on your credit limit also helps you in times of crisis or financial emergencies.

  2. Payment history: Pay your bills quickly, on time. By doing so, you let lenders know that you are reliable and that you ensure timely repayment of credit. If you miss a payment, your credit score could fall significantly.

  3. Negative remarks: Your credit reports must be free of any disparaging remarks. This includes accounts in collections, bankruptcies, as well as foreclosures.

To Sum Up

A plethora of causes can end up changing your credit score. You need not be worked up for it. Lenders generally focus on your payment history as well as your credit utilization to check if you have been regular in making payments.

The Intelligent Finance Tool by mymoneykarma ensures that you do not fail in making payments, by sending you frequent reminders. Why don’t you try it out and enjoy its benefits?

 

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