It happens to many of us at one point or another; you order your credit report and are stunned to see that your credit score dropped and is notably lower than what you were expecting it to be. So, what happened? And more importantly, what can you do to fix it? Here are some of the most common reasons:
A Hard Inquiry Occurred
If you’ve recently applied for additional credit or someone pulled your credit file (a lender at a financial institution or a potential landlord, for example), your credit score likely dipped because they created something called a hard inquiry.
Unlike a soft inquiry (which most often occurs when you check your own credit score), a hard inquiry involves a third party requesting a copy of your file and temporarily lowers your credit score. It’s important to note that not all inquiries from third parties result in hard inquiries; an employer checking your credit report during the hiring process will not negatively affect your credit score, for example.
This is why it’s important not to apply for credit from too many places in too short a period of time. The dip in your score can be disconcerting to see but it shouldn’t actually be a large enough decrease to negatively affect your ability to be approved for credit or other loans.
You have a Late or Missed Payment
If you forget a payment completely or make it a few days late, your financial institution will report it to the credit bureaus (Equifax and TransUnion) which negatively affects your credit rating and could explain why your credit score dropped.
Unfortunately, there’s no way to undo the damage until it falls off your report (seven years from the delinquency) but you can start repairing your score immediately by making sure all of your payments are made on time from here on out. In addition, the longer you go without making a late payment, the less heavily that late payment will affect your score.
You Significantly Reduced your Available Credit
If you charged significantly more to your credit card than you usually would, it can also account for a slight dip in your score. That’s right, even if you stay under your limit and still make your payments on time, using too much of your available credit at one time can negatively affect your credit rating.
This is because credit utilization is one of the factors that influences your credit report. Credit utilization is a way for banks to monitor how much available you credit you have and, more importantly, how much of that credit you actually need to use. The lower the ratio (and the less it appears you rely on credit), the better for your score.
On average, you should try to stick using 30% or less of your available credit at any given time. As challenging as this may seem, there are ways to get around it. You can try to split your purchases up across multiple cards, you can put the bulk of your purchases on the card with the highest credit limit, or you can call your bank and request an increase to your limit.
Your Account was Sent to Collections
Once your unpaid debt has gone from delinquency into collections, your credit score is pretty much guaranteed to drop. Unfortunately, there’s no easy way to repair this damage to your score other than to stay on top of all of your other bills and, once the delinquent debt has been paid, waiting for the collection to fall off of your credit score.
If the debt sent to collections isn’t yours or it’s been at least 7 years since your debt originally went delinquent, you can file a dispute with the credit bureaus to have it removed from your report.
Identity Theft/Fraud occurred
Someone fraudulently opening credit accounts in your name and racking up debt is a definitely one of the biggest potential reasons that your credit score dropped. The moment you notice fraudulent activity has taken place, contact your financial institution immediately. You should also contact your credit bureau to alert them to the fraudulent activity and file a dispute for any charges you were not responsible for.
In addition, make sure to contact the police as soon as possible; you’ll need a copy of the police report they issue to prove to that a crime has been committed when you’re filing identity theft reports and dealing with creditors. You should also contact the Canadian anti-fraud centre for extra assistance.
You Paid off a Credit Card and Closed the Account
Did you know that closing a credit card account after it’s been paid off is actually worse for your score than just leaving the account open? It might sound counter-intuitive, but credit bureaus consider the length of your open accounts when determining your score. That means that it’s better to leave a credit account that you’ve had for years open even if you no longer have any intention of using that card. If you’re worried about the temptation to spend, you can always cut the actual card up or take it out of your wallet while leaving the account open with your bank.
You Filed for Bankruptcy
If you filed for bankruptcy recently, you’ve probably already been warned that your score is going to take a tumble and it’s almost certainly the reason your credit score dropped. While there are other options that you should consider before filing for bankruptcy (like debt consolidation or entering into a consumer proposal), sometimes it’s the only option.
If that’s your situation, don’t despair too much. While your score is going to drop, you’ll have the opportunity to rebuild your score with time. In Canada, Equifax and TransUnion generally remove your first bankruptcy from your credit report 6 years after the date that you’ve been discharged. TransUnion extends that to 7 years for people who filed in New Brunswick, Newfoundland and Labrador, Ontario, PEI, and Quebec. If you declare bankruptcy more than one time, that information will stay on your credit report for 14 years.
Live in Toronto or the GTA and want more information about why your credit score dropped and what you can do to start repairing it? Book an appointment with us today!