Your credit score is an important number to keep up with, especially if you have a major loan coming up. For example, if you're planning to buy a house or car in the next few months, your credit score affects whether you're approved for a loan and the terms. Your credit score also impacts whether you have to pay a security deposit when you apply for utilities and similar services.
Credit scores go up and down based on how you handle your credit cards and loans. Keeping your credit score in the best shape means avoiding things that make your credit score drop. If you've noticed your credit score slip recently, there are a few explanations for why.
Some credit monitoring tools give you insight into the factors affecting your credit score, but here are some things that could hurt your credit score.
You just made a big credit card purchase.
After late payments, the next biggest factor affecting your credit score is the amount of credit you're using. That's 30% of your score. If one of your credit card balances shoots up in a month - because you financed a large vacation or transferred a balance - expect to see your credit score drop.
While late payments stay on your credit report for seven years, your balance information is updated each month. Fortunately, your credit score can recover as you pay down the larger balance.
The credit score calculation looks at the your credit card balance in relation to your credit limit. Because of this, having your credit score lowered can have the same impact to your credit score, even if your balance doesn't go up.
Similarly, closing a credit card that still has a balance can cost you precious credit score points because you no longer have available credit on that credit card. Paying off the balance before closing a credit card is better for your credit score.
A late payment showed up on your credit report.
Since 35% of your credit score is based on your payment history, a late payment can make a big dent in your credit score. Late payments are reported to the credit bureaus 30 days after your missed payment. The more recent the late payment, the bigger the impact to your credit score.
The more behind you get on your payments, the more damage is done to your credit score. After six months of missed payments, many creditors and lenders consider your account to be in default. Your account is closed and the balance in due in full. Defaulting on a credit card or loan can severely damage your credit score for several years.
You had an account go into collections.
Many companies use third-party collection agencies to help recover unpaid bills. You can have a collection account stemming from any of your debts, not just from credit cards and loans. For example, unpaid medical bills, library fines, tickets, and utilities can all be sent to a collection agency.
Once a collection agency is assigned to collect a debt, they typically report the account to the credit bureaus. The new negative account will cause your credit score to drop. Collections stay on your credit report for seven years, but your credit score less as time passes.
You applied for new credit.
A smaller portion of your credit score - 10% to be exact - is based on inquiries made to your credit report. Inquiries are added whenever you apply for anything that requires a credit check. If you're applying for multiple credit cards in a short period of time, your credit score can drop dozens of points.
Multiple inquiries related to rate shopping, e.g. with mortgage or auto loan, are treated as one inquiry as long as you keep the applications within a short window.
Only the inquiries stemming from applications you've made in the past 12 months affect your credit score. After that, inquiries stay on your credit report for another 12 months (for a total of 2 years), but they don't affect your credit score. Minimize the damage from new applications by only applying for the credit you need.
Opening an new account can hurt your credit score even beyond the credit inquiry. Part of your credit score is based on the average length of time you've had credit. New accounts can lower your average credit age can cause a short-term credit score drop. As accounts get older, they won't hurt your credit score as much (and may even boost your score).
Protecting Your Credit Score
If you credit score drops, you can recover the lost points, but it may take time depending on what's caused the damage.
Keeping your debt balances low and making your credit card payments on time are the two best things you can do to maintain a good credit score.