Credit Score Dropped 100 Points
When I paid off my debt, why did my credit score go down? Getting rid of a debt is always a good thing, but it could hurt your credit score in other ways.
It can feel good to pay off your last debt, but it won’t always help your credit score. Worse, it can actually lower your score, which seems counterintuitive.
Below, Whalegrows lists the five ways you might be hurting your credit score in a big way. These five reasons can be caused a dramatic reduction in your credit score.
1. You requested for a new credit card.
When you apply for a new credit card, the company will pull your credit report to see how much of a risk you are before giving you a line of credit. This type of credit check is called a “hard inquiry” or “hard pull,” and it temporarily lowers your credit score by a few points. Hard inquiries stay on your credit report for two years, but most lenders use FICO, which only looks at inquiries from the last year when figuring out your credit score.
But having a few hard inquiries on your credit report isn’t always a bad thing. After all, applying for credit cards is a great way to start building credit. When used correctly, credit cards can help you build credit by letting you charge purchases and pay them off in full by the due date. If you want to build your credit, you could use the cash-back Petal® 2 “Cash Back, No Fees” Visa® Credit Card or the Capital One Platinum Credit Card, which is for people with average credit.
Use preapproval or prequalification offers from card issuers to see if you qualify for a new card and cut down on the number of hard pulls on your credit report you don’t need. These won’t tell you for sure if you’ll get the credit card, but they will give you a good idea.
Spread out your credit card applications over time when it comes to actually applying for new credit products. You should only apply for a new credit card once every three months. If your credit score is low, you might want to wait even longer between applications.
2. You used a substantial amount of your credit to make a purchase.
Credit cards make it easy to buy big things because you don’t have to pay for them all at once. However, if you leave a big balance on your card, the credit bureaus will see that you’re using your credit more than you should be.
Your utilization rate, also called your debt-to-credit ratio, shows how much of your available credit you use compared to how much you have. You want to have a low utilization rate because using too much of your available credit limit shows that you are a financial risk to issuers. For the best credit score, experts say you should use less than 30% of your available credit, and some say even less than 10%.
Before you put a big expense on your credit card, make sure you can pay it off in full before the billing cycle ends. Having a big balance on your credit card hurts your credit utilization rate and costs you a lot of money in interest.
3. You forgot to pay your credit card bill.
Your payment history is the most important thing that affects your credit score. It makes up 35% of your FICO score, so if you miss a credit card payment, your score will go down right away. Lenders and credit card companies care a lot about whether or not you have paid your bills on time in the past. This is because it shows how risky you are.
According to FICO data, a 30-day late payment can lower a fair credit score by 17 to 37 points and a very good or excellent credit score by 63 to 83 points. But if a payment is late for 90 days, the same fair score goes down by 27 to 47 points, and the excellent score goes down by as much as 113 to 133 points. In other words, the bad effect will be worse if your credit score is high.
How fast your credit score goes back up after you miss a payment depends on your credit history and how you handle payments after you miss one. If you get back on track quickly, your credit score will probably start to improve along with your history of making payments on time. A good credit score depends on you making payments on time, and it’s even better if you can pay them in full.
4. You paid back a loan.
When you pay off credit card debt, your credit score goes up. When you pay off installment debt, like a mortgage or a student loan, your credit score goes down.
Paying off a loan, like your car loan, can actually lower your credit score because it means you no longer have that account. 10% of your FICO credit score is based on how many different kinds of credit you have. This is because it’s important to show that you can handle different kinds of debt.
But you shouldn’t let this stop you from paying off your loans. Being debt-free is good for your financial health as a whole, and it doesn’t make sense to pay extra interest over time just to save a few points on your credit score.
5. Your credit card immediately closed
Closing a credit card account, especially your oldest one, hurts your credit score because it lowers your overall credit limit (you want a high limit) and brings down the average age of all your accounts. 15% of your FICO score is based on how long you’ve had credit, which is why experts say you should start building credit when you’re young. The better your credit score, the longer you can show that you have been using credit.
The only time this doesn’t apply is when you’re paying for a credit card you no longer use. In today’s world, where travel is almost nonexistent, that could mean canceling your high-end travel credit card with a high annual fee, like the Chase Sapphire Reserve®, for which new cardholders pay $550 per year. It could also mean closing your secured credit card, like the Capital One Platinum Secured Credit Card, for which you paid a deposit to get a credit limit.
Before you cancel your card, talk to the company that gave it to you to see if you can downgrade to a card with no annual fee or, if you have a secured card, upgrade to an unsecured card. This could help you keep the credit line open so that it doesn’t show up as closed on your credit report. It could also help you get a card that fits your needs better.
How to get out of debt and improve your credit score.
Focusing on credit card debt first can help your budget since interest rates on credit cards are usually higher than those on installment loans. It also helps your score by making you use less of your credit.
Credit utilization is measured both for each card and for the whole account. If any of your credit cards are close to their limits, you should make it a priority to get the balances down to no more than 30% of your limit, and the lower the better.
Keep in mind these points to build credit:
• Always make timely payments. When payments are late, it can hurt credit in a big way.
• Don’t close your credit cards unless you have a good reason to, like an annual fee or bad customer service. When you close an account, the average age of your accounts can go down. It also cuts the amount of credit you can use, which makes your utilization go up.
• Be cautious when it comes to credit. If you don’t like the card as much as you used to, you could put a small, recurring charge on it and set it to pay for itself. So, you won’t forget to pay the bill, and the card issuer won’t close it because it hasn’t been used.
•Look at installment loans in the big picture. Don’t keep an installment loan open just to keep your credit score from going down. You’ll pay too much in interest.
How can I keep my credit score from dropping?
Here’s how to protect your credit once you’ve paid off all your debts.
Pay on time.
Set up reminders for when bills are due. Most issuers will let you set up reminders on your calendar or send you emails or text messages.
Watch for mistakes on your credit report.
If the information that goes into your credit score is wrong, nothing you do will help.
There are two ways to get a free copy of your credit report: Some personal finance sites and credit card companies have information about your credit report. And the credit bureaus are required to give you at least one free report.
The reports that you can get from the three credit bureaus once a year (or once a week until the end of 2023) can be dozens of pages long.
Dispute it if you see a mistake. If someone else’s file got mixed up with yours or if your identity was stolen, it could hurt your score in an unfair way. You should take care of that as soon as possible.
Don’t apply for a lot of credit in a short amount of time.
Opening a new credit account lowers the average age of your accounts and causes a “hard inquiry,” which can temporarily lower your score by a small amount. If you can, wait at least six months between credit card applications and do your research before you apply.
There are times when waiting is the best thing you can do for your credit. With time and good habits, anyone can get their credit score back on track. Most mistakes on your credit report disappear after seven years.