How do credit bureaus calculate your credit score? It may seem that there are people in secret rooms armed with dartboards, roulette wheels, or Magic 8-Balls attempting to assess your credit score daily. Sometimes it goes down, and you have no idea why.
There is a pattern, even if you cannot see it. Your credit score goes down because an event has taken place that, from the perspective of a creditor, makes it more likely that you will miss payments or default on loans. Here are a few such events that can concern creditors and catch you by surprise:
1. A Cancelled Older Account – If you have an old store card or credit card that you have not used in a long time, the card issuer may assume the account is dormant and close it without notifying you. This can drop your credit score in
two ways: It changes the average age of your accounts, which drops your credit score because your credit history looks less stable than before, and it increases your credit utilization (the amount of credit you use divided by your total available credit) which increases your repayment risk in the eyes of creditors.
2. Credit Report Errors – Credit reporting agencies are not infallible, nor are the creditors who report to them. A payment mistakenly marked as late, cases of mistaken identity, or simple administrative errors can easily make your credit history appear to be in worse shape than it is. It takes time to correct these mistakes, so we suggest periodic review of your credit report, along with credit monitoring services or alert packages, to discover issues quickly and minimize any damage. If you believe there is a mistake on your credit report, you can resolve it with a single click using our credit correction service. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
3. An Unforeseen Hard Credit Pull – Inquiries on your credit may be “soft pulls” that do not affect your credit score or more detailed “hard pulls” that cause your score to drop. Hard pulls reflect a more serious intent to open a new line of credit or switch some variety of creditor; therefore, the credit agencies consider your credit more at risk. Changes such as switching cellphone or Internet providers are effectively changes in creditors, and the new creditor will pull a hard inquiry as part of establishing your account.
4. Paying Off A Loan – Why would a responsible act like paying off a loan drop your credit score? The reason has to do with limiting your diversity of credit. When you have both installment accounts like an auto loan or mortgage and revolving accounts like credit cards, and you manage both accounts wisely, it shows that you handle multiple types of credit well. Without that diversity, risk is increased according to credit bureaus. Certainly you do not want to take out another loan just to improve your score, so relax — in this case, solid management of your remaining accounts will bring your score back up naturally.
5. Forgotten Connections – Do you and your ex have a joint account that you have forgotten about? Do you have an authorized user on your account that has neglected to pay bills? Are you still an authorized user on someone else’s account? These are all ways that you can end up with unexpected responsibilities and/or late payments that can negatively affect your credit score.
The bottom line: there are plenty of reasons why your credit score can drop without your knowledge. That is why it is important to check your credit report on a regular basis and/or set up alerts that notify you about changes in your credit score. You can then decide whether the drop is reasonable or whether it needs corrective action — and more importantly, you will not be caught by surprise by a credit score drop at an inopportune time. No dartboards or Magic 8-Balls are required.
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