It can be seen very often in various situations that many people wonder why their credit scores drop a lot in a certain month and what to do. It’s very common and everyone just doesn’t want to confront such situations. After all, there will be no chance for you to apply for a good credit card in several years if your credit history has been ruined.
Is it really a disaster when your credit score drops a lot? Obviously, no. Many people don’t know what to do just because they have no knowledge of the credit system and the way of the calculation of credit score, and how to deal with such situations. So this article is here to help:
- Why does your credit score drop?
- How to deal with it properly?
1. Why does your credit score drop?
Firstly, you have to figure out what score is dropping. We have official FICO score and also unofficial credit scores calculated according to non-FICO model provided byCredit Karma (CK) or Credit.com for free. Something serious, they think, happens to credit history when they just find out the CK score is dropping a lot. The truth is the CK score is unreliable to some extent, so don’t worry too much when you find out the CK score is dropping. You can get free official FICO score through other means, which is addressed in How to Get Free Credit Reports and Scores:
- FICO score of TransUnion Report provided by Discover and Barclaycard monthly.
- FICO score of Experian Report provided by Amex and Chase Slate.
- FICO score of Equifax Report provided by Citi in terms of some Citi cards.
Therefore, it will be very easy for you check out the official FICO score to see whether there’s something wrong to your credit score.
Now we take a look again at the calculation weight of FICO score: Payment History, 35%; Total Amount & Utilization Rate, 30%; Credit History, 15%; New Account & Hard Pull, 10% and Types of Credit, 10%, respectively. We can see that score dropping might happen because of credit history and credit limit due to their heavy weights in the calculation. Lots of people might wonder: isn’t it said that Hard Pull (HP) done each time will lead to score dropping? You score might drop a bit but won’t change drastically. I have 15 HP on Experian and still got 730 FICO scores when I applied for a credit card recently. So the number of HP doesn’t really make much difference.
Let’s get to the point. We have figured out the matter, and then the question is what will actually lead to credit score dropping drastically.
- High Utilization Rate: a low Utilization Rate (UR) can improve your score quickly, which is discussed in How to Improve Credit Score. No more than 10% of the total UR is a good thing, but lots of people are not aware of this and often max out the credit card to get a more than 90% UR rate, which results in a low credit score. And some of them only have about 650 FICO scores due to such thing. It happens a lot particularly when you just have one or two cards and the total credit line of them is not high.
- Something is Wrong with Your Payment History: which means, you forget to pay off your balance. Generally speaking, it can be waived by making a call to the bank for the first or second time when you miss Payment Due Date. Actually, it won’t be considered as a late payment if you pay off the balance several days after you miss the due date (it’s not a recommendation anyway). The consequence usually depends on the specified number between the 30-180 days late. The more, the worse. And if the balance is still not paid off, your debt might be reported to debt collectors and then go to Collections. Note that not only your payment history of credit card will be reported, but also your other loans, and even the hospital, renting, phone and utility bills. Many people get smashed up because of these bills. They don’t think of it as a problem if they don’t pay off the debt (or they just forget to). Or they think they won’t be tracked down because they don’t have a SSN and even don’t know their credit history has been ruined until the bills go to Collections.
In general, only high UR will not lead to a low credit score. Once the bills go to Collections, the credit score is more likely to drop to 500, which should be dealt with carefully without any doubt.
2. How to deal with it properly?
As told before, if your CK score drops, don’t worry too much and just go check out FICO score. Or you can find out whether there is something wrong with your credit report on the CK website. The score is calculated according to the report, so it’s easy for you to figure out whether there is a late payment.
And if you do have a low FICO score, it’s advisable for you to request a report for detailed information. If it happens that your application is rejected, the rejection letter sent by the bank will tell you that you have a chance to request a credit report. Just follow the procedures to keep informed. And besides, you can spend $1 on the Credit Report website to check out your credit reports from the three major credit bureaus for seven days. The report is in detail, and enough for you to figure out what’s going wrong. But don’t forget to cancel the trial or you will be charged monthly more than 20 dollars after 7 days’ trial. You’re presumed to have known what’s going on and so we’ll talk about how to deal with it.
High UR. Just lower it to improve your score in one or two months. In April, 2014, I applied for a Freedom card with a more than 90% UR, and the rejection letter showed that I only had 649 Experian FICO scores. I started to control UR in the coming days, and had 703 scores in June. So it won’t be hard for you to do so.
What if a late payment? The first thing that should be done is set Auto Payment for all your cards and other bills. And then make a call for mercy, and see if it can be waived for the first time. Give it up if it can’t be, and it’s your problem after all. Auto payment is highly recommended. Anyone can be careless. And what you can do is wait until the effect of a late payment is offset by time.
But if your bills go to Collection, that will be a really problem for you. First, you have to figure out what leads to Collection in the first place: a late payment or the hospital bills not be paid off. If it’s the late payment of a card, then you can’t argue about this, especially when you used or kept the card before. But if you are charged for the first time and even don’t receive your card, you’d better make a call to the bank to figure out what happened (sound recording is preferred), and if it was the bank’s fault, wrong address, for example, you can require that the bank should tell the credit bureau to offset all the effects. It is the same with other bills. However, you can’t blame others but only can make a call for mercy if you forget to pay off the bills received every month. Make a call to communicate with the bank if the bills are not received due to other reasons, and if it’s the bank’s fault, pay off the bills after the effects are offset by the credit bureau. Many people pay off the bills in the first place without knowing what exactly happened, which can be very bad for you. All in all, the responsibility should be made clear and pay off the bills after an agreement is made (evidence should be preserved).
Another common problem has been overlooked after the discussion above: personal information is stolen (identity theft included). That’s why we recommend that you request a detailed credit report. After checking the report carefully, it might be very easy for you to find out what actually is not your fault: debt collection from Verizon even if you haven’t ever enjoyed Verizon service, the cards you haven’t ever applied for and identity theft after you card has been lost (it should be distinguished from the card not received, and you’d better contact the bank to confirm). And in these cases, you can dispute with the bank if there is something wrong with the credit report of the credit bureau. Dispute info on credit report is easily found on the three major credit bureaus’ websites. You just provide your certificates according to the request. It may take some time, but you have to.
The worst is that a late payment will remain on your credit report for up to 7 years if you are habitually late with payments and the bills go to collection.
- Pay off on time and auto payment is preferred.
- Check out credit report or credit score monthly and solve the problem in time.