You pay your credit card accounts on time each month. You never miss a mortgage payment. You haven’t run up loads of debt. So why did your credit score suddenly drop 20 points?
You know the big reasons why your credit score might fall: late payments and a large amount of new credit card debt. But there are other reasons that aren’t so obvious. And if your credit score did take an unexpected dip, one of these less-obvious reasons might be behind it.
1. You canceled a credit card
You might think that canceling a credit card that you no longer use is a smart financial move. If it prevents you from running up charges on that card, it might be. But closing a credit card can also cause your credit score to drop.
This is because of something called your credit utilization ratio. This ratio measures how much of your available credit you are using. The lower this ratio, the better it is for your credit score. Say you have three credit cards each with a limit of $6,000. That’s a total credit limit of $18,000. Now say you have $6,000 of credit card debt. You are using $6,000 of $18,000 of total available credit, which is a credit utilization ratio of about 30 percent. Lenders like to see this ratio around this level or lower.
If you close one of those cards, you’ll suddenly be using $6,000 of just $12,000 of total available credit — a credit utilization ratio of 50 percent. That jump could cause your credit score to take an unexpected fall.
2. You’ve been building up credit card debt gradually over time
Closing a credit card account isn’t the only way to increase your credit utilization ratio. Maybe you’ve been steadily building up new credit card debt for months. You’re making your credit card payments on time, but you’re also increasing the total balances on your cards. This, too, can gradually cause your credit utilization ratio to rise and result in a dip in your credit score.
The better move is to pay off enough of your credit card debt each month so that the amount of your available credit is steadily declining instead of rising. (See also: The Fastest Method to Eliminate Credit Card Debt)
3. You’ve applied for new credit card accounts
Applying for new credit cards or lines of credit can also cause your credit score to drop, at least a little. Every time you apply for a new credit card or line of credit, notice of the inquiry will be added to your three credit reports — one each maintained by the national credit bureaus of TransUnion, Equifax, and Experian.
Each “hard” inquiry for new credit can cause your score to drop slightly. And if you’ve applied for several new credit card accounts at the same time, that drop can be higher.
The good news is that drops from applying for new credit are usually minor ones. myFICO reports that inquires for new credit only account for 10 percent of your total credit score. (See also: How Credit Inquiries Affect Your Credit Score)
4. You’ve co-signed for someone who’s missed payments
Have you ever co-signed on a loan for one of your children? It’s not uncommon for parents to do this to help their kids, say, qualify for an auto loan if their credit isn’t mature enough yet to qualify on their own. The plan is that the person you co-signed for pays his or her payments on time each month.
But what if that person doesn’t pay? Because your name is on the loan, you are also responsible for the monthly payments. Those missed payments will go on your credit reports, too. And that can send your score tumbling quickly. (See also: Should You Co-sign Your Teenager’s Credit Card Application?)
5. You didn’t pay a medical or utility bill
There are plenty of bill payments that aren’t reported to the credit bureaus. Experian, TransUnion, and Equifax don’t receive information about your payments to doctors, utilities, cellphone providers, and, in most cases, the rent you pay to your landlord each month.
However, missing these payments can eventually cause your credit score to drop. After enough missed payments, the creditors behind these bills might send your account into collections. This will send a debt collection agency after you. It will also result in a notice on your credit reports that you have accounts in collections.
This can cause your credit score to take a severe fall. So don’t ignore any bill, even if you think missing a payment won’t end up on your credit report.