“Why did my credit score drop?” is one of the most common questions that small business owners ask themselves.
Unfortunately, there is no one-size-fits-all answer, as there are many parameters that you need to take into consideration. In this article, you’ll discover some of the reasons behind a lower credit score, as well as the way to fix these problems. In a nutshell, you’ll get your answer to the question “why did my credit score drop?”.
But first, let’s define credit score:
Your credit score is a number that ranges from 300 to 850, it is based on your credit history and it represents your creditworthiness.
Lenders use credit scores to evaluate the probability that you’ll repay your debts. The higher your score is, the more financially trustworthy you’re considered to be.
Why is business credit important?
Your business credit score isn’t just a number, it represents the opportunity to grow your company and run your daily operations more smoothly and economically.
How? Well, a good credit score gives you:
- Higher chances to be approved for a credit card or loan.
- Lower rates and better terms when applying for a loan or credit card.
- More favorable deals from your suppliers.
- Higher chances to be approved in rentals.
But if you’re struggling with your credit score because it’s low and you’re wondering: “Why did my credit score drop?” keep reading.
Why did my credit score drop?
Here are some possible reasons:
1. You missed a payment
Your payment history is one of the main factors that significantly impact your credit score. It indicates your reliability when it comes to repaying your debts. If you miss a payment or make a late one, the lender loses the security that you’ll pay back the money you owe.
Solution: Pay your debts at once and try to explain to the creditor that you’re aware of your mistake and that it won’t happen again. Also, it would be a good idea to put text or email reminders on your bank accounts or set up automatic payments.
2. You applied for a new credit card or loan
Once you apply for a new credit card or loan, the lender usually checks your credit to determine whether you’re a suitable candidate. This inquiry can affect your credit score (depending on the lender). Keep in mind that a single inquiry can reduce your score a bit, but if you’ve applied for several loans or credit cards in a short time, you can seriously damage your score.
Solution: Apply for additional funding only when you actually need it and when you know there’s a high probability that you’ll get it. Make sure there are at least six months between applications.
3. You recently closed a credit card
Closing a credit card reduces the length of your credit history and increases your utilization ratio.
Solution: It would be wise to keep your old accounts open even though you don’t use them anymore. However, if your credit card comes with a high annual fee, consider switching to a better card or downgrading it to a version without annual fees if possible.
4. Your credit utilization is high
When you have unexpected expenses and cover them with your credit cards, your credit score may drop. The use of available credit or credit utilization can be calculated by adding up the balances on your different credit products, like lines of credit, car loans or credit cards and dividing the sum by your total credit limits.
Solution: Try to keep your credit utilization below 35 percent of your total available credit. For instance, if you use two credit cards with a $5,000 total limit, your combined balance should be below $1,750.
5. You paid off your car or student loan
One of the answers to the question “why did my credit score drop?” can be that you paid off your debts. Even though this is a great achievement, it means that you have one less account and maybe now you’re only left with credit card debt, for example.
Solution: Before closing any accounts, you should check your credit reports to see if other accounts could hurt your credit. Maintain these other accounts with a positive balance and keep your credit usage low. These practices will reflect positively on your credit score.
6. There are mistakes on your credit report
Sometimes mistakes happen and some inaccurate information may end up on your credit report, causing your score to decrease. These inaccuracies can imply that the lender has simply reported the wrong information.
Solution: Regularly check your credit reports for any mistakes. If you notice some irregularities, you can dispute the errors online or by email, following the process of the specific credit bureau.
7. Somebody else used your credit card
Another answer to the question “why did my credit score drop?” could be that someone else used your credit card account without your knowledge. Maybe your child used it to purchase an online game or it got stolen.
Solution: If a stranger used your card, reach out to your credit card issuer and you’ll receive a new card. More importantly, you won’t be held responsible for charges. However, if someone in your house used your card, it’s up to you to deal with this situation.
8. Your identity has been stolen
Sometimes the reason behind an unexplained drop in your credit score could be identity theft. One of the first signs you’ll notice when you check your credit reports are unfamiliar addresses or accounts.
Solution: Make sure you check your credit reports every once in a while. If you notice that something is wrong, visit identitytheft.gov and file a report.
9. Your credit limit was lowered
A lowered credit limit can also be the cause of your credit dropping. It leads to an increased credit utilization ratio which harms your credit score. For example, if your total credit limit was $15,000 and you carried a balance of $4,500—your utilization ratio would be 30%. But, if your credit limit was lowered to $11,000, the same balance, would increase your utilization ratio to 50%.
Solution: Keeping track of your credit utilization ratio will help you prevent negative effects on your credit score.
10. You co-signed a credit card or loan application
Last but not least, maybe you gave a hand to a friend or cousin who applied for a loan or credit card by co-signing. But if that person ran up a large balance on the credit card or missed a payment, your score is affected too.
Solution: Make sure you check the account online or by checking the statements. This way, you can keep an eye and prevent any damage.
Fix your credit score
Hopefully, now you’ve got the answer to the question “why did my credit score drop?”. As you can see, many factors affect this three-digit number.
However, don’t panic if your credit score drops. It’s quite normal for it to fluctuate and change over time, and there’s always a solution if it did drop.
If you need financial funds, but you’re scared that applying for a loan could affect your credit score, complete a short loan application form at Camino Financial. Our motto is No Business Left Behind and that’s why applying for a loan with us will have zero impact on your credit. Not only do we offer the best available rates and terms, but we also help you build your credit.