Unusual Reasons Your Credit Score Goes Down: What You Need to Know
You probably know the basics when it comes to earning good credit, or at the very least you probably understand the concept that you need to pay your bills on time in order to achieve good credit scores.
Yet making on-time payments is not going to be enough if you want to achieve credit score greatness. Credit scoring is actually quite a bit more complicated than that.
My father and I always have spirited debates about what makes for excellent credit. He comes from a time when making all of your payments on time was all you needed to do in order to have good credit.
In today’s world, however, that’s simply not enough. And if you are monitoring your credit scores on a monthly basis, you may feel confused as to why they’re not higher, especially if you are making a deliberate effort to improve them. Sadly, the reason your credit scores are a disappointment is not always so obvious.
Here are five reasons why your credit scores might be lower than you wish.
Reason #1: Your Credit Card Utilization Is High
Most people do not realize that how you manage your credit card debt is nearly as important to your credit scores as the payment history on your accounts. FICO and VantageScore, in fact, are designed to base 30% of your credit score points on your debt, and much of that 30% is based on your credit card balances relative to your credit card limits.
The “Revolving Utilization Ratio” is the term which describes the relationship between your credit card limits and your credit card balances (as they appear on your credit reports). If your credit reports show accounts which are highly utilized (meaning you have tapped into a sizable percentage of your available credit limits), your scores will likely suffer even if you make every single payment by the due date.
Reason #2: You Applied for Too Much Credit Recently
Another factor which credit scoring models consider when calculating your credit scores is how often you have applied for new credit within the past 12 months. Higher numbers of applications can be indicative of elevated credit risk. As a result, if you want your credit scores to soar, then you should probably try to keep new credit applications to a minimum moving forward.
Reason #3: You Have a Poor Mix of Account Types
Credit scoring models also reward consumers who demonstrate that they have experience managing a variety of different account types. If your credit reports only contain a single type of account, such as credit cards, then opening a small installment account such as a credit builder loan could be helpful. Of course, making your payments by the due date and keeping a $0 credit card balance on your reports is more important than your account mixture, but account mixture still matters nonetheless.
Reason #4: You Believe Occasional Late Payments Are Acceptable
Some people mistakenly believe that the occasional payment slip up is not a big deal, especially if the majority of the time they make their payments as agreed. Unfortunately, that is not the way credit scoring works. A credit scoring model will look at your credit reports and search to see if any late payments are present. If the answer to that question is yes, then you will probably be awarded fewer credit score points than you would have earned otherwise.
Reason #5: You Open New Accounts Too Often
The age of your oldest account and the average age of the accounts which appear on your credit reports are two more factors which credit scoring models like FICO and VantageScore look at whenever your scores are calculated. As your average age of accounts grows older, your credit scores will generally benefit. However, if you are constantly opening new accounts then you do not give that average account age a chance to increase, a habit which could hold your credit scores back.