There are several reasons why credit scores drop. From late and missed payments to maxing out credit cards and applying for too many new credit accounts within a short period of time. And of course, there are more sinister reasons like fraud and errors.
Just keep in mind that all credit scores react differently. A credit behaviour or habit that makes one credit score drop might not affect another credit score at all.
Let’s take a look at the most common reasons why credit scores drop and how to deal with them.
How Quickly Can Your Credit Score Drop?
How fast your credit score can drop depends on a few things, including the number of accounts in your credit file and how often your creditors report to the credit bureaus.
Your credit scores are generally updated as new information is reported to the credit bureaus. Lenders and creditors typically report your credit information to the credit bureaus every 30 – 45 days. However, some lenders may report it more often, while others may report it less frequently. Moreover, not all lenders report your information on the same day, so your credit report may be updated with new information more frequently, particularly if you have multiple credit accounts.
The constant flow of information being sent to the credit bureaus can then impact the calculation of your credit scores. As such, your credit scores may drop very quickly, especially if you missed payments on multiple credit accounts.
How Much Can Your Credit Scores Change?
Even though there may be a lot of changes in information being reported, that doesn’t necessarily mean that there will be a major difference in your credit score. While some factors can significantly change your scores, others may only make a minor difference.
Main Reasons Your Credit Scores Can Drop
Your credit scores are calculated using a number of factors, each of which can cause your credit scores to drop quickly. Here are some reasons your credit score can drop quickly:
Your Payment History (i.e Late Payments)
One of the main factors that affect your credit scores is, of course, your history of payments. Most credit products you use come with a minimum balance payment and a maximum payment date that you have to adhere to in order to avoid a penalty. For example, every credit card comes with a monthly statement that includes a bill.
If you don’t manage to pay the minimum monthly payment by the due date, the lender charges you a penalty fee plus interest on the unpaid portion of the bill. Late payments, short payments or missing them completely can cause your credit scores to drop. This is especially true if the bill goes for more than 30-days without being paid.
How To Deal With Late Payments
The only way to deal with a late payment is to make sure it doesn’t happen again. Set reminders on your phone to pay your bills, pick one day out of the month to manage your money, or set up automatic payments if that makes sense for the situation.
Your Credit-Related Delinquencies
In credit terminology, delinquencies or derogatory marks refer to negative credit-related transactions that have become more serious.
When credit accounts go too long without payment, the lender will sometimes sell them to collection agencies. The lenders report it to the credit bureaus. This can result in a drop in your credit scores. Derogatory marks can remain on your credit report for up to 10 years depending on the type and the credit bureau. Some of the most common derogatory marks include:
- Collections
- Bankruptcy
- Consumer proposal
- Judgment
- Foreclosure
How To Deal With Derogatory Marks
The best thing to do is to make sure any and all of your derogatory marks are legitimate. If there has been an error and your credit dropped because of it, you can get in contact with credit bureaus and dispute the mark.
| How To Dispute An Error With TransUnion | Learn More |
| How To Dispute An Error With Equifax | Learn More |
Your Credit Utilization
Your credit utilization ratio is based on how much of your available credit you use. For example, let’s say you have two credit cards, one has a limit of $5,000 and the other $3,000. Your total available credit is $8,000. If you consistently only charge a couple of hundred dollars worth of expenses to each card every month, your utilization ratio will be low as it should be. But, if you max out your cards one month because of a large purchase, your ratio will increase quickly which could result in your credit scores dropping.
Most experts say that keeping your credit utilization ratio at less than 30% is best.
How To Deal With High Credit Utilization
These are two main ways to manage high credit utilization. Ask your credit card providers for a credit limit increase. For this to work you can’t also increase your spending. Or, pay off your credit cards twice a month.
Recent Inquiries
Whenever you apply for new credit, most lenders will pull a copy of your credit report to determine your creditworthiness. The credit industry calls this an inquiry. There are two types of credit inquiries. Checking your own credit file is a soft inquiry or soft check. This does not affect your credit scores.
However, a hard inquiry or hard check happens when a lender or other financial organization reviews your report during an approval procedure. Hard inquiries can cause your credit scores to drop a few points. While this might not seem like much of an impact at first, too many hard inquiries may cause your score to drop more drastically. A hard inquiry can remain on your Equifax report for up to 3 years and up to 6 years with TransUnion.
How To Deal With Too Many Credit Inquiries
If you don’t want too many inquiries on your credit report, the best thing to do is not apply for too many new credit products within a short period of time. One thing to keep in mind is that if you’re shopping around for a mortgage or a car loan, for example, all the inquiries associated with one of those products will be treated as one inquiry and not multiple, typically within a one-month period.
Closing A Credit Account
When it comes to credit accounts, the longer your history of responsible credit behaviour, such as timely payments, the better your credit scores will be. The average age of your credit accounts is taken into consideration when your credit scores are calculated. This is why it’s important to keep older accounts open. Furthermore, when you cancel a credit card, it will reduce your total available credit, which will likely increase your credit utilization ratio. You may see your credit scores drop from both a higher credit utilization ratio as discussed above, or from lowering the average age of your accounts
How To Deal With Closing A Credit Account
If you do need to cancel an account, make sure to pay off the remaining balance first. It’s always better to cancel a newer account rather than one you’ve had for multiple years.
Undisputed Errors
Furthermore, undisputed errors made by the credit bureaus or lenders themselves can affect your credit score. In fact, this is one of the main reasons you should regularly request a copy of your credit report.
With both credit bureaus’ operations based strictly online, they usually accept any information provided by lenders without examining its accuracy. Therefore, any errors may go unnoticed, which may affect your credit scores negatively.
Some common errors found on credit reports that may cause your credit scores to drop include:
- Incorrect personal information (name, mailing address, date of birth, etc.)
- Incorrect Social Insurance Number
- Late payments that weren’t actually late (i.e. weren’t reported on time by the lender)
- Unauthorized hard credit inquiries
How To Deal With Errors In Your Credit Report
If you have found an error in your report, you can dispute it to the credit bureau in question, and if it’s justified, they should correct it within a few weeks. If you’re worried about fraud or identity theft, you can also pay for the credit monitoring service offered by both bureaus, which should alert you whenever an account is activated in your name.
Identity Theft
More severe errors occur in cases of fraud and identity theft. Sometimes, credit accounts will be opened in your name without you even being aware of it. An identity thief can open an account and apply for a loan and other credit using your personal information. If you don’t notice and the account goes unpaid for too long, it can not only cause your credit scores to drop but could lead to more financial turbulence until the error is corrected.
How To Deal With Identity Theft
Unfortunately, dealing with identity theft is a lengthy process. In a nutshell, you’ll need to get in contact with both credit bureaus and ask about placing a fraud alert on your files. Make sure your bank accounts are safe by changing any passwords and consider cancelling your credit cards. Get in contact with any companies that provided the thief with your information or let them open an account in your name. Next, you may want to file a report with your local police.
What Is A Credit Score?
A credit score is a three-digit number that encapsulates all your actions as a credit user, somewhat like your grade point average. All your negative and positive credit transactions are calculated together. The result is a number that credit score that ranges between 300 and 900.
In general, a 660 credit score and above gets you approved for almost any credit product. On the other hand, if your credit score falls within the poor range (under 560), your chances of approval reduce and you’re more likely to end up paying a higher interest rate than someone with a higher score.
Does Everyone Have A Credit Score?
If you’ve ever been approved for and used a credit product, such as a credit card or personal loan (mortgage, vehicle loan, etc.), it means that you have a credit score. It also means that a credit report has been opened in your name by one or both of Canada’s main credit bureaus, Equifax and TransUnion.
How Do The Credit Bureaus Get Your Credit Information?
Banks, lenders, and certain third-party organizations report your credit information to the credit bureaus. Generally, banks and other lenders will report to one of the two bureaus, but some will report to both. For example, if you get a credit card, the credit card company will report your activity to the credit bureau they’re partnered with, which will then create a credit report for you. From that point on, every time you use your card, the card company records each action and reports it to the credit bureaus ( usually every 30 – 45 days).
How To Improve Your Credit Scores?
As we said earlier, once your credit score has dropped significantly, it can take a lot of time and effort to raise it back up. That being said, one of the main ways of improving your credit scores bit by bit is to be responsible and proactive when it comes to your finances and credit-related products.
Review Your Credit Report
In Canada, you can access your credit score and credit report for free from Equifax. Similarly, TransUnion offers Canadians their Consumer Disclosure (a file that contains your credit report information) for free. Or, you can choose a third-party provider like CompareHub to keep tabs on your credit score. Reviewing your credit report can help you understand what’s affecting your credit scores and help you make the necessary changes to help improve them. Moreover, you can catch any errors that may be unfairly bringing your credit down.
Use Your Credit Responsibly
Most lenders like to see a debt-to-credit ratio of 30% or below. Higher ratios can negatively affect your credit scores, so you can either keep your purchases low or simply pay your bills twice within the same cycle to keep it low. If you find that you’re getting too near your credit limit, you can also try increasing it to lower your debt ratio.
Make Your Payments On Time
Given that payment history often accounts for around 35% of your credit score, full and timely payments can significantly improve your credit. If you find that you’re having trouble remembering to pay your debts by their deadlines, try setting up an automatic payment system through your bank.
Create A budget
A budget is a basic tool you can use to better track your spending and ensure that you have enough money to pay your monthly debt obligations. This is an indirect way of ensuring your credit is not affected by missed payments.
Bottom Line
As mentioned, your credit score is a versatile tool that can help you in various situations, such as securing loans and other credit products. In fact, your credit scores are one of the main elements used by lenders to determine your creditworthiness, as well as the interest rate you’ll be paying for their products once you’re approved. That’s why it’s extremely important to keep your credit score in good shape whenever and however you can.
