By ANNA TRINH
You’re on top of your finances — your payment history is flawless, you keep your utilization below 30 percent and your accounts are in good standing.
However, when you log in to receive your eagerly awaited score update, you see that your score has dropped – even though you can’t think of any negative changes you’ve made.
It can be disheartening to see your score go down when you’ve been working hard to keep your finances in order. So, what’s up? Here are four surprising reasons why your score might’ve changed.
1. You forgot about that old, never-used account – and your issuer canceled it without telling you.
If you ever decided to apply for a card in a retail store spur-of-the-moment to get a discount, you’re not alone. And if you’re like me, you may have stopped using or forgotten about that card.
When an account becomes inactive, lenders can and sometimes will close the account – and they may not be obligated to give you notice when they do so. Banks don’t make money off of a card that isn’t being used because they don’t collect interest if there’s no balance; therefore, there’s little incentive for them to keep inactive accounts open.
There’s also no industry standard for how long an account must remain inactive before being closed.
Closed accounts can affect your score for a number of reasons. For example, if your spending remains the same after your account is closed, your credit utilization rate will increase since the total available credit you now have across all your cards will decrease.
What you can do:
Consider setting up a small monthly charge, such as a Netflix subscription, to your card and then set up auto-pay to make sure you don’t miss a payment.
2. You have a new hard inquiry.
While you may not have applied for a new credit card recently, you might have made some changes in your life that resulted in a hard inquiry on your credit report:
- You switched your internet provider, signed a new cellphone contract or signed up for premium cable because you didn’t want to miss out on the new season of “Game of Thrones.” Internet, cellphone and cable providers can conduct credit checks with your permission to see if you have the financial capacity to pay for their services.
- You applied for or signed a lease on a new place. Landlords have the right to run credit checks on their tenants (with permission) to check for past eviction judgments and determine if you are fiscally responsible.
- You upgraded one of your current credit cards or asked for a credit limit increase. Depending on your bank and lender, asking for a credit card upgrade or credit limit increase could result in a hard inquiry. Ask your lender whether it will pull your credit report with a hard inquiry before requesting any upgrades or credit increases, and deciding based on their response.
It’s also important to keep in mind that if you have an account in collections, the collection agency may pull your credit report. Collection agencies can pull your credit report to check for personal information that relates to the collection of a debt.
What you can do:
In most of these cases, pulling your credit report will typically require your authorization. It’s always a good idea to ask the lender or service provider whether these transactions will result in a hard inquiry. Also, if you find a hard inquiry that you didn’t authorize, keep in mind that it may indicate fraud, and you may want to take action as soon as possible.
3. You paid off a loan.
This may sound strange, but paying off a loan can cause your score to drop initially. When you pay off a loan and close the account, you may end up with fewer types of credit accounts, which could impact your score.
Ken Chaplin, senior vice president of TransUnion, recommends “keeping a mix of credit accounts and loans so you’re able to build and establish good credit history.” Having different types of accounts can benefit your credit health because it could help lenders to see you as more financially experienced.
What you can do:
Don’t fret. While paying off a loan has the potential to lower your credit score initially, it can result in a more flexible cash flow, which can provide you with the means to pay down other debts. It can also lower your debt-to-income ratio, which can increase your chances of getting approved for future loans.
4. You’re an authorized user on a delinquent account.
It can be easy to forget that you were previously added as an authorized user of an account to help you build credit. When you’re an authorized user on another person’s account, credit bureaus will generally report that account’s balance, payment history and utilization on your credit report.
You can benefit as an authorized user if the primary account holder is someone who pays his bills on time every month and keeps his utilization low.
However, if the account holder misses a payment or maxes out his credit card, its impact can negatively affect your score as well.
What you can do:
You may be able to get yourself removed from the account if you contact the lender and request that your name be removed. If the lender agrees, the account should no longer appear on your credit report after a reasonable period of time, and if it still does, you can contact the bureau to dispute it.
It’s important to keep in mind that if the account is the oldest one on your credit report, its removal could lower your average age of credit history and may result in a score drop. It might be worth it, though — score changes from your age of credit history don’t typically impact your score as much as a late payment.
Credit scores can change for a number of reasons, and there may not be cause for alarm if yours changed by a few points.
While the reasons listed here might explain why your score dropped, lenders tend to focus more on your payment history as well as your utilization because it shows them that you’re consistently staying on top of your finances.
There are many steps you can take to continually work on your financial health. Auto-payments and credit limit alerts can usually be set up through your lender’s website and can help you make sure that you get your payments in on time and that you keep your utilization low.