It is very common for entrepreneurs to be unsure why their credit scores dropped. Unfortunately, no one answer works for everyone, many parameters can affect your score.
In this article, you will discover some of the reasons why your credit score may have dropped, as well as how to fix these problems. In short, you will get your answer.
But first, let’s define what the credit score is:
Your credit score is a number between 300 and 850, it is based on your credit history and represents your creditworthiness and your ability to pay debts.
Lenders use credit scores to assess the likelihood that a customer will repay their loan. The higher your score, the more financially reliable you are.
Why is a business credit score important?
Your business credit score is not just a number, it represents the opportunities you have to grow your business and run your day-to-day operations in a more financially fluid manner.
A good credit score gives you:
- Better chances of being approved for a credit card or loan.
- Lower rates and better conditions when applying for a loan or credit card.
- More favorable offers from your suppliers.
- Greater chances of being approved in rentals.
But if you’re having trouble because your credit score dropped and you don’t know why, read on.
Why did my credit score go down?
Here are some possible reasons why your credit score has dropped:
You forgot to make a payment your payment history is one of the main factors that significantly impact your credit score. Indicate if you are reliable when it comes to paying your debts. If you forget to make a payment on time, lenders lose the assurance that you will pay them the money they will loan you.
Solution: Pay your debts immediately and try to acknowledge your mistake with the creditor and explain that it will not happen again. So that it doesn’t happen again, it’s a good idea to place email or text message reminders on your bank accounts, or if possible set up automatic payments.
You applied for a new credit card or loan
When you apply for a new credit card or loan, the lender will generally check your credit to determine if you are a suitable candidate. This query can affect your credit score (depending on the lender). Keep in mind that a single query can lower your score a bit, but if you have applied for multiple loans or credit cards in a short time, your score can be seriously damaged.
Solution: Apply for additional financing only when you need it and when you are sure there is a high probability that you will get it. Make sure there are at least six months between applications.
You recently canceled a credit card
Canceling a credit card reduces the length of your credit history and increases your utilization rate.
Solution: Sometimes it is advisable to keep your old accounts open even if you no longer use them. However, if your credit card comes with a high annual fee, consider switching to a better card or, if possible, changing it to a version without annual fees.
Your credit utilization is high
When you have unexpected expenses and you cover them with your credit cards, your credit score can go down. You can calculate your credit utilization by adding the balances in your different credit products (such as lines of credit, auto loans, or credit cards) and dividing the sum by your total credit limits.
Solution: Try to keep your credit utilization below 35% of your total available credit. For example, if you use two credit cards with a total limit of $ 5,000, your usage must be below $ 1,750.
You finished paying your car or student loan
Believe it or not, a score can go down if you recently finished paying off a large debt. Although closing an account is a great achievement, it means that you have now active accounts that are negative, for example, you have a debt on your credit card.
Solution: Before paying off any account, check your credit reports to see if other accounts could damage your credit. Remember to keep these other accounts in a positive balance. This practice will positively reflect on your credit score.
There are errors in your credit report
It’s not that common, but mistakes do happen sometimes and your report could have some inaccurate information, which can lower your score. These inaccuracies may mean that a bank or lender has simply reported incorrect information.
Solution: Check your credit reports regularly for errors. If you find irregularities, you can dispute the errors online or by email, following the process for each specific credit bureau.
Someone else used your credit card
If your credit score went down, someone else could have used your credit card without your knowledge. Maybe one of your kids used it to buy an online game or your card was stolen.
Solution: If a stranger used your card, contact the issuing bank to cancel it and receive a new one. More importantly, you will not be responsible for the charges. However, if someone in your house using your card, it is up to you to deal with the situation.
Your identity has been stolen
Sometimes the reason behind an unexplained drop in your credit score could be identity theft. One of the first red flags is that unknown addresses or accounts appear on your credit report.
Solution: Make sure to check your credit reports from time to time. If you notice something is wrong, visit identitytheft.gov and file a report.
Your credit limit was lowered
A lower credit limit can also be the cause of your credit falling as it leads to a higher rate of credit utilization. And this hurts your credit score. For example, if your total credit limit was $ 15,000 and you had a balance of $ 4,500. Your utilization rate is 30%. But, if your credit limit was lowered to $ 11,000. And with the same balance, your utilization rate would increase to 50%.
Solution: Keeping track of your credit utilization rate will help you avoid negative effects on your credit score.
You are a co-signer of a credit card or loan
Perhaps you decided to help a friend or cousin who applied for a credit card. Or loan by co-signing the application. But if this person made a big expense on the credit card. Or forgot to make a payment, your score suffers.