If your credit score took a dive, we're going to show you how to bring it back up.
So you've just had the unpleasant experience of seeing that your credit score dropped.
Since no one likes to go backwards, a dip in your credit score is both frustrating and stressful. It can have a serious impact on your life, as you may have a harder time qualifying for the top credit cards or obtaining the best personal loan rates.
That's why it's crucial that you figure out what happened to your credit and how to correct the issue. Here are all the possible problems that could have caused your credit score drop, plus how you can fix each one.
1. Your balances got too high
If you've recently been charging more than usual onto your credit card or you used it for a big purchase, that can raise your credit utilization. Credit utilization is 30% of your FICO® Score, and your card issuers report your balances every month, so it's a factor that can change your credit score quickly.
Your credit utilization is simply your combined credit card balances compared to your combined credit limit. Let's say you have $1,000 in available credit and $700 in balances. That would put your utilization at 70%, which is considered too high and would damage your credit.
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How to fix it -- Reduce your credit utilization to 30% or less (the lower, the better) and you'll quickly raise your credit score. Here are three ways to do this:
- Pay down your balances.
- Ask your card issuers toincrease your credit limits, as more available credit lowers your credit utilization.
- Open a new credit card. When its credit limit gets added to your credit file, it will increase your available credit.
2. You closed a credit card
When you close a credit card, you'll have less total available credit, because the credit limit on that card gets removed from your credit file. That means if you've been carrying any balances, they'll make up a greater part of your total credit, causing your credit utilization to increase.
Another problem with closing a credit card is that the average age of your credit accounts could decrease. This is a smaller part of your FICO® Score, but it still counts for 15%.
How to fix it -- Check your credit utilization and reduce it if it has gotten too high, either by paying down balances, asking for credit limit increases, or opening a new credit card.
While there's no quick way to raise the average age of your credit accounts, you can at least avoid applying for any new credit accounts until your score has improved.
3. You missed a payment
Your payment history is the part of your FICO® Score that matters the most, accounting for 35%, so missing a payment is almost sure to cause a major credit score drop.
It's important to note here that missed payments only count against you if they're at least 30 days late. Between zero and 29 days late, the creditor can charge you a late fee, but they can't report your account as late to the credit bureaus.
How to fix it -- Get that missed payment in right away, because your score will continue to sink the longer you wait.
Set up auto-pay or payment reminders on all your bills to make sure that you don't miss a payment again. It can take over a year for your credit score to recover after a missed payment, but any additional missed payments will just set you back even further.
4. You applied for new credit
Any application for new credit, be it a credit card, a line of credit, or a loan, results in a hard inquiry on your credit file. Each hard inquiry can cause your score to drop a few points, although it's nothing big.
How to fix it -- There's no work needed on your part this time, as hard inquiries only affect your credit for a year. One hard inquiry won't cause that much of a dip in your score.
You will, however, want to avoid any more credit applications so that your score can recover.
5. You had an account reported to collections
A collections account can wreak havoc on your credit. The original creditor will report that you didn't pay, and then the collections agency that buys the debt will also report it to the credit bureaus.
If you had an excellent credit score to begin with, a collections account could easily drop it by 100 points or more.
How to fix it -- First, verify that it's a legitimate debt. If not, you can dispute it with the creditor and whichever credit bureaus have the debt listed on your credit report.
Collections accounts can damage your credit for years, but you may be able to negotiate what's known as a "pay for delete" with the collection agency. Simply put, you let the agency know that you'll pay off the account only if they agree to take it off your credit file.
Not every collection agency will agree to this and the credit bureaus frown on it, but it's worth a shot.
6. There's an error on your credit file
That credit score drop may not necessarily be your fault. If there's an error on your credit file, it can decrease your credit score. Errors are more common than most consumers realize, which is why it's so important to monitor your credit.
How to fix it -- Request your credit report from each of the three major credit bureaus. You're legally entitled to one report from each bureau per year, free of charge. See which of those three have the error, and then report it through the online dispute process each bureau offers.
For a step-by-step guide to disputing an item on your credit report, here's how to do it with Equifax, Experian, and TransUnion.
To stay on top of changes to your credit file, you should pull your credit reports at least once every year. You can also sign up for a free credit monitoring service for immediate notice of any changes.
7. You paid off a loan
If you did a double-take for this one, you're not alone. As backwards as it seems, paying off a loan can ding your credit.
The reason for that is what's known as your credit mix, responsible for 10% of your FICO® Score. It's considered better to have a more diverse mix of credit. For example, two credit cards and one installment loan, such as a personal loan, would be better for your score than three credit cards.
If you pay off your only installment loan and are left with just credit cards, it can impact your credit score.
How to fix it -- Maintain a low credit utilization and make all your payments on time. You could borrow another loan, but that's only worth doing if you actually need one. It's not worth paying interest to give your credit score a small bump.
Getting your credit score back in shape
Taking care of your credit is one of the smartest financial decisions you can make. There's plenty of ways your credit score can drop, some of them more severe than others, but they're all fixable if you know what you're doing.
If your credit score recently went down, start by figuring out what the cause is. Then follow the steps above to fix the problem.
