You likely know that monitoring your credit score is an important part of managing and maintaining your financial health, but it’s also important to understand how your credit score is calculated and the key factors that are used in the calculation.
Even then, though, there are the outliers, the unknowns, the credit goblins that go bump in the night and, come morning, you’ve got a small ding on your credit score that you had no control over. While there’s not much, if anything, you can do to avoid this handful of scenarios, it’s good to understand that you can take action after the fact to remedy them.
Here are five random reasons your credit score could drop.
1. You Paid Off a Loan or Credit Card
Wait, what? While the expert consensus is that paying off a credit card or loan is positive and shouldn’t negatively impact your credit scores, lots of consumers report this happening. So what gives?
There are a couple of things that can happen:
- If the loan you paid off was your only active installment loan, you would likely see a small drop in your credit score. It has to do with your mix of active accounts, which is one of the five main factors that determine your credit scores.
- If you have other accounts, it could be they have higher balances than the loan you paid off, meaning your credit utilization has shifted.
Of course, these things don’t tend to happen in a vacuum. It’s likely many things on your credit file are changing at once, so it can sometimes be difficult to pinpoint the precise impact one account is having on your credit score. You can keep track of what’s going on with your free monthly credit report summary from Credit.com.
2. Your Credit File Is ‘Mixed’
When an item on your credit report gets mixed up with someone else’s, it’s commonly referred to as “mixed files” and it can be very difficult to straighten out.
This happens most often when someone with the same name or a similar name applies for credit and a piece of their file becomes mixed with yours. A consumer with a common name like “John A. Smith,” for example, could see his file mixed with a John B. Smith or a John A. Smith, Jr.
To prevent problems of mixed files, always be sure to use complete and consistent information when filling out a credit application, especially if you are a junior or senior or have a common name. And to ensure your credit reports are accurate and complete, you need to check your free annual credit reports, which you can get on AnnualCreditReport.com.
Finding the problem is only the beginning — then you need to fix the errors on your credit report. You can do this by disputing the information with the credit bureaus yourself, but if you have trouble resolving the issues or are overwhelmed by the process, you can also hire someone to help repair your credit for a fee.
3. Your Issuer Closes Your Card/Lowers Your Limit
This situation just stinks. Not only do you lose your credit account, but it can also ding your credit score.
Creditors can close accounts for various reasons, including delinquency, inactivity and default. It is only necessary that they let cardholders know of the closure within 30 days of the account being closed.
Closing an account can have a negative impact on your credit score largely by affecting your credit utilization rate—the amount of available credit you have versus the amount of debt you are carrying. It could also wind up affecting the age of your credit report.
Likewise, issuers can lower your limit without warning. While other actions require 45 days’ advance notice, thanks to the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, changes to your credit limit aren’t considered “significant changes.” (Such “significant changes” as they are called in the Truth in Lending Act, include changes to your interest rate, fees or grace period.)
With a lower limit, your credit score could go down if you don’t also reduce your spending, because the more you use of your available credit across all your credit cards, the lower your credit score will likely be. General rule of thumb is to keep the amount of debt you owe below at least 30% (ideally 10%) on your available credit for the best credit scoring results.
4. You Co-Signed on a Loan Gone Bad
Co-signing essentially puts your credit score in the hands of someone else. Now, when the person is paying the loan, it’s great for your credit score. Each on-time payment made on the loan gives your credit profile and credit history a boost. On the flip side, if they make a late payment, you make a late payment in the eyes of lenders.
If you co-signed a loan for a friend or relative and he or she is not able or willing to pay back the loan, you must step up or face the consequences, including a drop in credit score, if the loan payments fall behind. At the end of the day, your signature is on the loan, so you’re responsible for it.
5. Someone Stole Your Identity
New account fraud is a common form of identity theft: Someone gets their hands on your Social Security number and uses it to borrow money or open a credit card they never intend to repay. Since the accounts use your Social Security number, they’ll likely end up on your credit report, and that information (which is probably negative — identity thieves generally don’t make payments on your behalf) will factor into your credit scores. That’s why a sudden drop in your credit scores could be a sign of identity theft. A credit freeze can prevent new account fraud, but it doesn’t prevent someone from taking over and abusing your current accounts. Even if you have a freeze in place, it’s important to monitor your credit for suspicious activity.
More on Credit Reports & Credit Scores:
- The Credit.com Credit Reports Learning Center
- What’s a Good Credit Score?
- How to Get Your Free Annual Credit Report