3 Actions That Could Drop Your Credit Score
, by Rob Kaufman
Your FICO® Scores go up and down all the time. It might've increased because your credit utilization (the amount of available credit you're using) went down. Or it could've decreased because you didn't pay a bill on time. These are the type of actions that you'd expect to have an impact on your credit score.
There are, however, actions that can lower your score without you ever thinking they would. We're sharing them with you to help you avoid future surprises and keep your credit score on an upward trend.
Closing a line of credit . You'd think that paying off a credit card and closing that line of credit would increase, not decrease your credit score. Well, that's not always the case.
When you close a line of credit, you actually lower your overall credit limit. That means you increase the amount of credit you're using versus what's available to you.
For example: You have three credit cards, each with a credit limit of $10,000. That's a $30,000 total credit limit. If you close one account, you only have a $20,000 total credit limit. So, when you make purchases on the cards you have left, the available credit remaining on a $20,000 limit is less than if you had a $30,000 total credit limit. This increases your utilization ratio which can affect your credit score.
Not checking your credit reports. According to a study conducted by the Federal Trade Commission, one in five people have an error on at least one of their credit reports.1 Some of these errors can lower your credit score which could hurt your ability to get new lines of credit. They can also make the terms (i.e. interest rate) of the credit agreement more expensive.
It's important to check your credit reports at least once a year. If you find a problem or error, report it to the appropriate credit bureau as soon as possible. You want to be sure that you're not a victim of identity theft or that someone else's mistake is stopping you from getting the credit you deserve.
Making an expensive purchase. So, it's a month when you're spending very little on your credit card and you're feeling good about it. Then you see something you want (or unexpectedly need) and it's expensive. You could see a credit score drop - even if you pay the balance in full by your due date.
This might happen since credit card issuers usually report credit card balances on the last day of the billing cycle. That means that the balance on your credit card statements is frequently the balance that appears on your credit report. As with #1 above, this all comes back to credit utilization. Even if you don't spend a lot of money, the amount of available credit at the time the issuer reports your balance will reflect your credit utilization ratio. If it's very high, your score could drop.
The 3 actions listed above are some "unexpected" reasons your score would go down. There are others which shouldn't surprise you, like making a payment more than 30 days late, applying for new credit, one or more of your credit limits were lowered, to name a few.
If you keep an eye on your credit reports, think carefully before making purchases and pay your bills on time, you're on the right track to stabilizing - and possibly increasing - your credit score.
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