Credit score a very sensitive thing. You can not take chances when it comes to it. Your small mistake would take your months of efforts on toss. There are various factors which affect your score. Few reasons would slowly affect your score And some are the reasons for sudden drop in score. Beware of those. Which are those reasons? Let’s have a look at 5 most common and sudden reasons of how you would drop your score.
1. Late Payments
Often we think that what’s in one late payment? But if once we made a late payment and for the first time it didn’t reflect on our credit report, then it would be our habit. Thinking that nothing happened first time when we made a late payment nothing would happen next time as well. We would stop taking the payment cycles casually and the score would start dropping!
2. Too Many New Inquiries
There can be a possibility that you are in dire need of funds. So you go and apply at various banks to shorten the process of finalising the one lender. You know what your situation is, however, while you make so many inquiries for the credit, it is considered as a hard inquiry. And when multiple hard inquiries are made, it is considered a credit healthy behaviour and with each hard inquiry your score would drop for 25 points or more. This might also get you to loan defaulter’s list.
3. Credit Card Utilization
Any credit card you have would have the maximum limit as per your eligibility. But its never a good practise to use the limit till it exhaust! It is always a good practise to use 30% - 35% of the total limit allocated you. Using card up to 50% of its limit is maximum on some occasions is okay. However, not advisable but still could be considered. If you use the credit limit of your card up to its max, you will experience a drop in your score. As credit card works best when you want to enhance credit score, it can flip the table if not used wisely.
4. Closing an Old Account
If there any old account which is currently not in use, but have had many transaction with it earlier and you close that account, even that would cause a sudden drop in your score. Your old account always reflect how responsible you were at that point. Even if you had some negative flags attached to that account, it is still considered a good habit to keep inactive. As soon as you would close the old account, you would experience the score going down.
5. Lowered Credit Card Limit
If the banks decided to lower your credit card limit, it would a solid reason behind it. The major reason would be considered when you would not be paying your billed amount for a longer term. You would be making minimum payment every month, but even that has a limit. After some months banks would be charging the interest on that carry forwarded amount. And for multiple times you must have failed even to pay that. In such scenes, the banks would lower your limit. As you must have failed multiple times in paying the due bill your score would be on toss, along with that if the credit card limit is lowered, it would still go down.
Along with the five reasons mentioned above, remember the five parameters which make a credit score. Any of the parameters if not worked on properly, would result in a dip in your credit score and drag you in loan defaulters list. The amount that is owed is given 35% of weightage, your payment history and behavior is given 30% weightage. New Credits, Types of Credits and Account History has the rest 35%. any goof up in any of these five things will take your score on a ride and also would make you helpless!
Always remember, the Credit Score would drop too fast but it takes months of efforts in getting it back to track. So, be responsible enough and try not do any defaults.