Late payments, new accounts, credit inquiries, and bankruptcy can cause your credit score to drop. Maintaining old accounts and using credit responsibly can gradually improve your score.
Lenders use your FICO credit score, a number between 300 and 850, as an indication of whether or not you’re likely to pay off your debts. Since your credit score affects everything from your ability to get a credit card to your ability to secure a mortgage, it’s crucial to know what can cause your credit score to go down. Late payments, having only new accounts, many credit and bankruptcy inquiries can cause you to fall.
One of the most common reasons people see their credit score drop is a late payment. Lenders who review your credit report can see if you are 30, 60, 90 or more days past due on an account. If you fall significantly behind on a payment, expect to see your credit score drop. For this reason, consumers with a history of being late sometimes decide to take advantage of the automatic bill payment services offered by many banks.
Since 15% of your credit score is based on the length of your credit history, having only new accounts in your name makes for a low number. For this reason, younger consumers tend to have slightly lower credit scores than their older counterparts, even if all other factors are equal. To increase your score, avoid continually closing old accounts. Even if you have a credit card that you rarely use, keep the account open so lenders will see it as an old part of your credit history.
The number of credit inquiries made on your report can also cause your credit score to go down. This is because lenders think you may be planning to keep spending money if you’re trying to open multiple new accounts in a short period of time. To keep your score high, don’t apply for credit cards or loans unless absolutely necessary. However, personal inquiries won’t affect your credit score, so it’s okay to request a copy of your credit report regularly to check for discrepancies or signs of identity theft.
While bankruptcy can provide a fresh start for those in serious financial trouble, filing for bankruptcy will cause your credit score to drop significantly. Plus, it will stay on your credit report for 10 years. Generally, filing for bankruptcy will drop your credit score by 160 to 220 points.
If you have recently been denied credit because your score is too low, don’t be discouraged. Since the FICO score system is designed to allow for recent good behavior to help offset past mistakes, making a conscious effort to use credit cards responsibly and pay your bills on time will gradually improve your score. It’s not an easy process, but the results are well worth the extra effort.
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