Why Your Credit Score Drops

• Pay down the balance on your credit cards. Reducing how much you owe on your cards will increase your available credit and, thus, your credit utilization ratio.
• Keep old credit card accounts open even if you paid them off. When you pay off a credit card, you may be tempted to close the account. But by doing so, you reduce your total available credit, which could spike your credit utilization ratio.
• Ask your credit card issuers to raise your credit limit. Some will increase your credit limit if your credit score is high enough to justify it.
• Use time to your advantage. Opening a new credit account can temporarily lower your credit score, but over time it will boost your score because it will increase your available credit. Provided you don’t max it out, your credit utilization ratio will improve.

Changes in Credit History

The information in your credit reports can go back seven, and in some cases 10, years.6 When something changes, that can affect your credit score—for better or for worse. For example, if you have years of on-time monthly payments on your report but you’ve been late with several of them recently, credit score could take a hit. And as we’ve mentioned, closing a credit card account can also lower your score because it will reduce your available credit and raise your credit utilization ratio.

Similarly, because the scoring models favor accounts with a long payment history, adding several new credit accounts could lower your credit score at first by reducing your accounts’ average age.3 As those accounts age, though, they will raise your credit score, as long as you keep up with the payments.

Tips on Managing Credit History to Maintain or Improve Credit Scores

• Always make on-time payments.
• Leave credit card accounts open even if you paid off the balance and don’t plan to use that card again.
• Limit new credit accounts.
• Check your credit reports periodically for errors (as explained below).

Credit Limit Reductions

If your lender reduces your credit limit, as sometimes happens, that will reduce your total available credit and increase your credit utilization ratio, impairing your credit score.

Keep in mind that it’s usually best to hold your credit utilization ratio below 30%. If you have total available credit of $10,000 and you’re currently using $3,000 of it, your credit utilization ratio is 30%. But if your lender reduces your credit limit, dropping your total available credit to $6,000, your credit utilization ratio will jump to 50%. This can cause a drop in your credit score.

How to Monitor Credit Limits and Manage Credit Utilization to Mitigate the Effects of Credit Limit Reductions

• Don’t max out your credit cards. Keep balances low so a credit limit reduction won’t severely hurt your credit score.
• If one lender reduces your credit limit, check with another to see if it will increase your limit to keep your total available credit steady.
• Watch your mail or email for any notices from your card issuers. According to the Consumer Financial Protection Bureau, they are generally required to send you an “adverse action notice” if they lower your limit or close your account.

Identity Theft and Fraudulent Activity

When bad actors steal your identity and open new credit accounts in your name, it could lower your credit score in multiple ways. The first is by opening a lot of new credit accounts at once. The second is not paying on those accounts, resulting in missed payments. The third is maxing out those credit cards, increasing your credit utilization ratio. Likewise, if someone steals your credit card information and makes a lot of charges, it could increase your credit utilization ratio.

Therefore, it’s important to review your credit account activity often to ensure that you haven’ been a victim of identity theft or other crimes.

How to Monitor Credit Reports and Address Identity Theft or Fraudulent Activity

• Always review your monthly credit card statements, or check more often online, for any transactions you don’t recognize.
• If you see fraudulent activity on your credit statements, call your lender immediately to report it.
• Review your credit reports frequently to look for suspicious activity. Under federal law, you are entitled to a free copy of your credit report at least once a year from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. The official website for that purpose is AnnualCreditReport.com.
• Freeze your credit. If you don’t plan to apply for new credit in the near future, you can “freeze” your credit file with each credit reporting agency.9 That can make it difficult or impossible for anyone to obtain for credit in your name. When you’re ready to apply for new credit, you can temporarily unfreeze your files.
• If you have spotted fraudulent activity on your credit report, ask the credit reporting agencies to place a fraud alert on your credit reports. This notifies lenders to ask for more verification to ensure it’s you when some applies for credit in your name.

How Can I Avoid Late or Missed Payments and Maintain a Good Credit Score?

One easy way to keep from missing payments is to set up automatic payments through your bank checking account.

What Steps Can I Take to Minimize the Impact of Credit Applications on My Credit Score?

If you are rate shopping for a mortgage or other loan, obtain all your quotes within a short time frame. Scoring models typically recognize these for what they are to minimize the impact on your credit score.10

How Does Credit Utilization Affect My Credit Score, and How Can I Reduce It?

Your credit utilization ratio looks at how much of your total available credit you currently use. You can reduce it by paying down your debts or adding more credit accounts.

How Can I Protect Myself From Identity Theft and Fraudulent Activity That May Impact My Credit Score?

Freezing your credit file can help protect your credit score by preventing criminals from opening accounts in your name. Also keep a close eye on your credit cards and don’t give out your numbers to any person or company you aren’t absolutely sure of. Finally, monitor your free credit reports for suspicious activity.

The Bottom Line

There are several reasons why your credit score could drop. This includes making late payments or missing payments altogether, maxing out your credit cards, or taking out a lot of new credit all at once. Avoiding these situations can help you maintain a good credit score. By doing so, you will keep your credit history strong, which lenders will look favorably upon when you are ready to apply for new credit. Having a solid credit score can also lead to lower car insurance rates, approval for an apartment lease, or landing a new job.

Don’t let a low credit score hold you back! Take control of your financial future. FAST Annuities puts you in control. Schedule a consultation with a financial advisor today at 855-898-3278 or visit our Instagram for ideas and tips: @fastannuities.

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Reference: [https://www.investopedia.com/reasons-why-your-credit-score-drops-8612511]