According to a poll of over 3,000 Americans by TransUnion, at least six in ten US adults say their income has been adversely affected by the COVID-19 health crisis. 78% of them are concerned about making good on loans and paying their bills.
These people might be right to be in distress since late or missed payments on loans can have a significant effect on your credit score. Today, it’s essential to have a good credit score if you want to open a credit card, take out a mortgage, and more.
However, if you’ve noticed a sudden drop in your credit score, several factors could be at play. Fortunately, most credit score dings can be easily recovered and are temporary. Here’s how you can protect your score from flunking.
What Causes Your Credit Score to Drop
According to www.creditninja.com/dojo/credit-score-trends, in 2018, there was at least a 5 point rise in credit scores across all age groups than in 2017. This increase is probably due to fewer people having low credit scores, while more people had their credit ratings increase.
If you find yourself in the lowest credit score range, know that there are many reasons why your credit score might suddenly drop. Listed below are the three most common reasons why:
A Large Purchase
For some, credit cards are the quickest way to make large purchases since you don’t have to pay cash upfront. However, charging a high balance on your credit card will account for a high CUR (Credit Utilization Rate)or debt-to-credit ratio.
Your CUR measures how much credit you’ve used compared to how much credit is available. Ideally, you need to aim for a low CUR because excessive use of your credit limit implies that you are a financial risk to credit card issuers.
Experts suggest keeping your CUR at least 30% to obtain the best credit score. Before charging a large purchase onto your credit card, ensure that you can repay it in full before the billing ends.
Repaying a Loan
Although repaying your credit card loan can boost your credit score, repaying installment debt has a negative impact. Paying off installment loans can cause your score to drop temporarily because it would mean that you no longer have a variety of open accounts.
Having multiple credits contribute to at least 10% of your FICO credit score since lenders need to assess if you can afford to repay a loan. However, do not let this stop you from repaying your loans. Being debt-free can help your financial health.
Applied for a New Credit Card
When you apply for a new card, card issuers pull your credit report to know if you pose a risk before lending you a credit line. It is called a hard credit check, which temporarily cuts down your score a few points.
Hard credit checks will remain in your credit report for at least two years. However, FICO only considers checks from the last twelve months when computing your credit score.
How to Protect Your Credit Score
It is important to be mindful of how your spending habits can impact your credit score. You have to be aware of the external actions that can affect your credit score.
To protect your credit score, consider doing the following:
Check Your Credit Report
It is wise to regularly check your credit report whether or not you have made any payment changes.
TransUnion, Experian, and Equifax are now offering weekly online reports (for free) through April 2021. If you want to download your report, you have to answer a few verification questions and type in identifying information.
Consider checking your credit report on all three credit bureaus because they might have different information. Reviewing your credit report will not only keep you updated on your credit score, it’ll also give you enough time to rectify errors and take corrective measures if required.
Correct Any Errors
When you find any inconsistencies in how your account is being reported, have it corrected right away. The quickest way to correct an error is to visit the three credit bureaus’ portals for disputes.
Typically, creditors have thirty days to look into the mistake. However, the Consumer CFPB (Financial Protection Bureau) is temporarily extending it to forty-five days.
Other mishaps must be corrected, as well. For instance, your credit report has records of addresses you have never resided at or accounts that you didn’t apply for. Reach out to the organization, be it a collection agency, a credit card company, or even the court to correct the errors made on your report.
If the data you obtained from these organizations matches your information, but still don’t recognize the documentation as yours, there’s a high chance that you’ve been a victim of identity theft. Moreover, if you have problems correcting any error, you have the right to complain to the CFPB.
Own Your Mistakes
Often, a mistake is on your end. In this case, you can ask for a goodwill removal from the company involved if you misunderstood the obligations or terms of your agreement. A goodwill removal is essentially a letter that you write to your creditor, explaining the situation around the negative mark on your credit report.
You ask them to remove the negative mark out of the goodness of their hearts. Talk to your lender and explain what happened. For the company to accept your letter, you must have a valid reason why you made a mistake.
Additionally, good credit history can back you up to get the negative item eradicated from your credit report.
Takeaway
Consistent financial responsibility and discipline are required to maintain a healthy credit score. You also need to be vigilant about inconsistencies and erroneous reports in your credit history. These issues must be addressed and corrected right away to prevent sudden drops in your credit score.
