Credit scores seem to be all the rage these days. Everyone seems to care about them, they want to know what their credit score is and what it means, which is great because having a positive credit score is very important if you're ever interested in credit. So if you regularly monitor your credit score and you notice a drop, being concerned is a very normal reaction.
A low credit score can make it harder to get a mortgage or a car loan, and it can make borrowing for other things more expensive. Credit reporting agencies like Equifax and TransUnion use very complex calculations to come up with their scores, and small changes in your credit history can cause it to rise or fall. To fix this problem, it's essential to find the cause for the drop and then develop an effective strategy to remedy the situation.
7 Common Reasons for Credit Score Drops
While it might not be easy to identify a specific reason for a drop in your score, there's enough public information available about credit reports and scores where we can figure out the most common reasons for credit score drops. Here are the top seven most common causes for a credit scores to fall:
- Your payment was late or missing. Payment history on all types of unsecured debts has a huge impact on your score. If you're 30 days late or more, your credit card company or lender is likely to report the problem to Equifax and TransUnion Canada, and they will automatically lower your score. Even making the minimum required payment on a bill can prevent this problem. If you're not always on the ball when it comes to making your payments on time, consider setting up auto-payments for your credit card bills, even if it's just $20, that way you won't get docked for unnecessarily late payments.
- You made a large purchase with credit. The ratio of your debt to available credit is an important part of your score. The more available credit you use, the lower your score typically is. Whether you decide to use a significant portion of your credit to buy gifts for the holidays or book an extravagant vacation, a score drop is likely to follow.
- Your account was sent to collections. If you're simply unable to pay an outstanding balance on an account and the company decides to send your information to a collection agency, the credit reporting agencies will consider you a greater borrowing risk, and therefore lower your score. Collections can remain on your credit history for seven years.
- You applied for additional credit or someone checked into your credit history. It seems unfair, but the credit reporting bureaus can penalize excessive inquiries into your credit history by lowering scores—but it all depends on the type of inquiries they are! Fortunately, inquiries only stay on your history for one year, and they only account for about 10 percent of your overall score.
- Your identity was stolen. Your good credit score is an attractive target for thieves. If a hacker steals your personal information, they can open new accounts and throw off the balance of credit utilization, producing multiple delinquent debts.
- Your credit card was closed. The longer you have a credit card and make on-time payments, the better your credit score gets. Longevity of accounts shows lenders that you're a trustworthy investment. By closing an account, you lower your overall credit availability and part of your positive repayment history.
- You filed for bankruptcy. Going bankrupt seems like an obvious reason for a credit score drop, but many people are surprised by just how much their score is affected when they successfully file. Bankruptcies in Canada stay on your credit report for six years, and if you file for bankruptcy a second time, it can stay on your credit report for fourteen years. Learning how to avoid bankruptcy will help you maintain your great score.
What You Can Do to Fix Your Credit Score
Your strategy for fixing or rebuilding your credit score depends on the cause for the drop. With something like a missed payment, there's not much you can do other than wait for the information to fall off your report. But if you have a collections account in your history, you may be able to get it removed by negotiating with the collections agency when making a payment. If the cause of the drop is due to false or fraudulent information, reporting the issue to Equifax or TransUnion Canada quickly is crucial. If that doesn't fix the issue, Canada's Office of Consumer Affairs has additional information.
While you can mitigate credit score drops in some situations, prevention is a much more effective overall strategy for maintaining a good credit score. That means paying your credit cards on time, keeping your available credit high, and especially avoiding bankruptcy. A financial coach can help you develop the skills needed to accomplish all these goals. For more advice about credit scores and general financial well-being, you can contact Credit Canada and book a free credit counselling session with a certified credit counsellor. Call 1.800.267.2272 to book today!