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Editorial ValuesWe hold our articles to the highest editorial standards by conducting original reporting, citing recent and relevant research and providing full context to ensure readers have all the facts they need to make important decisions about their health. Editorial Standards Expert ReviewsIn a world of widespread misinformation, we believe in the power of trustworthy expertise. Our articles are reviewed by doctors, nurses, registered dietitians, certified personal trainers and other qualified experts. Verifying FactsAccuracy is our top priority. Articles with our "Fact Checked" label cite only the most reliable sources of information that our editorial team has carefully vetted. const FP = {“featured_posts_nonce”:”a71560924f”,”featured_posts”:[{“description”:”Despite saving money all year, these families are rethinking travel, gifts, and more amid the holiday season’s high prices.”,”hub”:{“hub_title”:”Saving Money”,”hub_link”:”https:\/\/time.com\/nextadvisor\/saving-money\/”},”ID”:63503,”image”:”https:\/\/time.com\/nextadvisor\/wp-content\/uploads\/2022\/12\/NA-Family-Savings.jpg”,”link”:”https:\/\/time.com\/nextadvisor\/in-the-news\/how-four-families-are-redefining-holiday-traditions-saving-inflation\/”,”post_title”:”How Four Families Are Redefining Holiday Traditions to Deal With Record High Inflation”,”reading_time”:6},{“description”:”The first to come are usually the first to go. The housing market is no different. Sun Belt and Rocky Mountain cities like Boise, Idaho, were at the forefront of home price growth in 2020 and 2021. In October, those same regions led the nation in home price decreases. While home values ticked up 0.1% […]”,”hub”:{“hub_title”:”Mortgages”,”hub_link”:”https:\/\/time.com\/nextadvisor\/mortgages\/”},”ID”:58386,”image”:”https:\/\/time.com\/nextadvisor\/wp-content\/uploads\/2022\/09\/NA-prices-drop-3-1.jpg”,”link”:”https:\/\/time.com\/nextadvisor\/mortgages\/10-places-where-home-prices-are-dropping\/”,”post_title”:”The 10 Cities Where Home Prices Are Dropping (and Rising) Fastest Right Now”,”reading_time”:6},{“description”:”If you’re banking on a tax refund from the government next year, it might be smaller than you expect. The Internal Revenue Service is already warning people that their 2022 refunds may be less than their refunds from the last two years since many of the pandemic tax benefits \u2014 like the expanded child tax […]”,”hub”:{“hub_title”:”Taxes”,”hub_link”:”https:\/\/time.com\/nextadvisor\/taxes\/”},”ID”:63361,”image”:”https:\/\/time.com\/nextadvisor\/wp-content\/uploads\/2022\/12\/NA-The-IRS-Is-Already-Warning-Taxpayers.jpg”,”link”:”https:\/\/time.com\/nextadvisor\/taxes\/irs-warning-about-smaller-tax-refunds-how-to-prepare\/”,”post_title”:”Why the IRS Is Warning Taxpayers About Smaller Refunds Next Year, and How You Can Prepare”,”reading_time”:8}]};There are lots of reasons why your credit score could have gone down, including a recent late or missed payment, an application for new credit or a change to your credit limit or usage. The activities that affect your credit scores correspond to the way the credit scoring models calculate them. That means the most important information to understand about credit is the factors that go into your scores. Payment history is the biggest component in the most commonly used FICO® Score☉ models, followed by the amount of available credit you're using (in other words, your credit card balance) and the length of your credit history. There are other elements, too, that could affect your credit scores, such as inaccurate information on your credit report. Experian offers several options that may help to boost your credit score. Below are the most common reasons for a credit score drop—and how to come back after your score takes a hit. You Have Late or Missing PaymentsYour payment history is the most important factor in your FICO® Score, the most widely used credit scoring model. It accounts for 35% of your score, and even one late or missed payment can have a negative impact. So, it's key to make sure you make all your payments on time. If you are more than 30 days past due on a payment, credit issuers will report the delinquency to at least one of the three major credit bureaus, likely resulting in a drop in your score. Payments that become 60 or 90 days past due will have an even greater effect on your score.. If these delinquencies are not paid, the credit issuer may send your debt to a collection agency, and the collection account will be recorded on your credit report. Records of your late and missed payments remain in your credit file for seven years, while positive payment history on an open account can stay on file indefinitely (or 10 years if the account is closed in good standing). Be sure to make all your payments on time so the record of your strong credit behavior bolsters your score for years to come. You Recently Applied for a Mortgage, Loan or New Credit CardWhenever you apply for a new line of credit, lenders will request a copy of your credit report to determine your creditworthiness. They decide whether to lend to you by viewing characteristics like your payment history, credit usage and the types of accounts you currently hold. Each time you authorize someone other than yourself, such as a lender, to check your credit history, a hard inquiry is recorded on your credit report and could slightly affect your score for up to two years. As your credit profile matures, it's natural to accumulate hard inquiries. But if you apply for too much credit in a short period of time, it can negatively impact your scores and affect the likelihood that lenders will approve you for new credit. Depending on how many inquiries you already have, a new hard inquiry could cause your score to drop, but potentially only for a short period of time. And any effect on your credit score should disappear in about one year. Your Credit Utilization Has IncreasedMaxing out your credit card could cause a quick drop in your credit score. Depending on your card's credit limit, making a large purchase or simply running up your balance can increase your credit utilization ratio, the second most important factor in calculating your FICO® Score. An increased credit utilization ratio can indicate to lenders that you are overextended and that, financially, you're not well-positioned to take on new debt. Your credit utilization ratio is calculated by adding all your credit card balances at any given time and dividing that sum by your total revolving credit limit. For example, if you typically charge about $2,000 each month, and your total credit limit across all your cards is $10,000, your utilization ratio will be 20%. You should aim to keep your credit utilization ratio below 30%, and for the best scores, below 10%. So, if your total credit limit is $10,000, keep your balances below $3,000 at all times to help keep your score in good shape. One of Your Credit Limits DecreasedSimilar to maxing out your credit cards, having your credit limit decreased can increase your credit utilization ratio and negatively affect your credit scores. Imagine, as in the example above, your total credit limit was $10,000 and you carried a balance of $3,000. In this case, your utilization ratio would be 30%. If a credit card issuer lowered your limit to $6,000, but your balance remained the same, your utilization ratio would change to 50%. This could cause your credit score to drop. Credit card issuers set initial credit limits based on factors including your income, current debt-to-income ratio, credit history and credit score. An issuer might lower your credit limit if, among other reasons, you haven't been using your card much or if you frequently miss payments or pay late. You can request a credit limit increase from your current issuers or open a new credit card account if you're concerned that your credit limit is too low. But know that if your limit recently went down, an increase might be hard to come by, and it may be best to wait to request more credit until your score improves. Regardless of whether your credit limits are shrinking or your balances are increasing, keeping an eye on your credit utilization ratio will help you better understand your fluctuating credit score. You Closed a Credit CardThink twice before closing a credit card you don't use. Closing a credit card account will not only increase your utilization ratio, it may also reduce the length of your credit history—both of which can impact your credit score. When you cancel a credit card account, that credit limit is removed from your overall utilization ratio, which has the potential to lower your scores. Closing a credit card account you have had for some time can also shorten your average credit age, and that will factor into your credit score. The length of your credit history counts for 15% of your FICO® Score, so a longer history is better for your scores. Keep in mind, however, that if your account is closed in good standing (meaning you made all your payments on time), it could remain on your credit report for up to 10 years. Unless the credit card has a high annual fee that you cannot afford or it tempts you to spend more than you should, it doesn't hurt to keep the account open to maintain your credit limit and length of credit history. There Is Inaccurate Information on Your Credit ReportRegularly checking your credit reports is one of the best ways to ensure no inaccurate information shows up in your file. Although it's rare, mistakes happen, and it is possible that incorrect information on your credit report—such as inaccurate personal data or payment history—is causing your scores to drop. If something in your report is inaccurate, it could be a result of a lender accidentally reporting the wrong information. It could also be a sign that you have fallen victim to identity fraud. If you see something you believe is inaccurate, dispute the information with all three credit bureaus as soon as possible. But keep in mind, some pieces of data can't be disputed, like credit inquiries, accurate birth dates and credit scores. You've Experienced a Major Event Such as Foreclosure or BankruptcyThe late payments that often lead up to a bankruptcy or foreclosure harm your credit scores—and the events themselves can make matters worse. Bankruptcy is a legal process initiated by borrowers looking to get relief from debt payments, and it's the most harmful single event to a consumer's credit. Foreclosure is when your mortgage lender takes possession of your house, often following four consecutive months of missed payments, and is second only to bankruptcy in terms of credit harm. In addition to damaging your credit score, either event can disqualify you from certain types of borrowing in the future. A mortgage lender may be unlikely to take you on as a borrower if you have a foreclosure in your past, for instance. A legitimate foreclosure mark on your credit report will stay there for seven years. The amount of time a bankruptcy stays on a credit report depends on the type of bankruptcy filed. Chapter 7 bankruptcy, for instance, appears on your report for 10 years from the date you filed, while Chapter 13 bankruptcy appears for seven years. What Is a Good or Bad Credit Score?Maintaining a good credit score has plenty of benefits, including potentially saving you a significant amount of money—and stress—over time. Good scores will help you qualify for more credit products at lower interest rates. Bad scores, on the other hand, may prevent you from qualifying for certain types of credit or may result in getting approved for credit products at higher interest rates, since your profile presents a bigger risk to the lender. Credit scores are divided into different scoring ranges. Many scoring models, including the FICO® Score, use a range of 300 to 850. In that model, scores above 800 are considered exceptional, while anything above 700 is typically considered good. Scores below 669 are considered to be fair or poor. In 2020, the average FICO® Score in the U.S. was 710, according to Experian data. Ways to Improve Your Credit ScoresIf you're looking to improve your credit scores, these tips can help.
Handling a Dip in Credit ScoresA drop in your credit score can be stressful, but it doesn't have to be permanent. There are ways to bring your score back up and to prevent another decrease in the future. Remember that credit scores are dynamic, and that you have the ability to improve yours with your own habits—an empowering truth that you can apply to other parts of your financial life too. |
