If you didn’t pay late, let an account fall into collections or commit another major credit no-no, why did your score take a dive?
There are several possibilities.
1. You’re using your cards too much
Using your cards isn’t wrong, per se. That’s why you got them. But using up too much of your credit limit harms your score. Credit utilization (how much you owe vs. your available credit) is a major component in various credit-scoring models, says Nancy Bistritz, spokeswoman for the credit bureau Equifax. It accounts for 30 percent of your FICO score, so expect an almost immediate impact if you run up high balances.
In fact, utilization is the most common culprit behind score drops, says Constance Carter, certified credit expert and author of “Keeping Score: What you Need to Know to Make your Credit Score Grow.”
So if your balances start creeping past one-third of your total credit limit (perhaps during the holidays?), pay them down before your banks generate your monthly statements and report that high utilization to the credit bureaus.
“If you go high and can pay it down before it reports, you’re in the clear,” Carter says. “If it reports that month, that’s going to kill you.”
Consumers with excellent credit need to be especially careful because, the higher your score, the steeper the score drop will be. Those with fair credit might experience a glancing blow of 10 to 20 points, while those above 750 could see a 40-point plunge, Carter says. That’s because scoring algorithms consider slip-ups from otherwise impeccable consumers a warning sign of serious problems.
2. You’re not using your cards enough
So fickle are the credit-scoring gods that they may also punish you for not using credit enough. If you pull your score after letting your cards gather dust for years, you might realize it has declined since you last checked – especially if you also don’t have any car loans, student loans or a mortgage populating your credit report.
Credit scoring algorithms reward healthy payment behavior, Carter says, including on-time payments. If there’s nothing to report in that department, there’s nothing buoying your score.
“So use those cards, but don’t abuse them,” Carter says.
You might put a recurring bill on a dormant card, Carter suggests. Or use it to buy gas and pay it off in full.
3. You applied for a new card
There’s nothing wrong with applying for a new card, if you can handle it responsibly. But credit card applications have a two-pronged effect on your score.
First, card applications will cause the bank to pull your credit reports. That credit check is a hard credit inquiry, Bistritz says, which will cause an immediate (but temporary) score ding. The impact of inquiries lessens over time, and they fall off your credit reports entirely after two years.
A new card can also decrease your average age of accounts. This falls into “Length of Credit History,” which accounts for 15 percent of your FICO score. While a lengthy history is rewarded, a shorter history is considered less favorable. Say you have two 10-year-old cards and then add two new cards. Your average age of accounts drops from 10 years to 5 years, wounding your credit score.
Carter experienced this scenario recently when she added a new card to her collection.
“Even though it was a good card, it dropped my score,” she says. “It minimized my average age of accounts.”
How much to worry about score drops
As you can see, using credit in normal ways can dent your score. That’s frustrating. Different scoring algorithms (FICO, Vantage and other models used by free credit score sites) may report different fluctuations. That’s frustrating, too.
Unless you’re trying to get a major loan in the near future, however, just keep your overall credit picture healthy and ride out the natural ups and downs of your scores as you acquire new cards and use the ones you have. Today’s decline might be followed by a steep incline next month.
“Your credit score is a snapshot of your financial health, at a specific point in time,” Bistritz says. “It is not uncommon for it to fluctuate from day to day.”