6 min read
Confused about a sudden drop in your credit score? Understand why this happened and how to prevent against future hits
A good credit score is used for much more than applying for a loan or getting a credit card. Credit scores say a lot about how you pay your monthly bills and long-term debts. But if your credit score drops, it can narrow down what interest rate you’ll pay on loans, the cost of your car insurance, and whether or not you get that apartment you want.
When you understand why your credit score drops and how to rebuild your credit, you’re in a better position to make financial decisions that will impact your future for the better.
Credit bureaus gather, track and store information about you, your financial accounts and credit history. They use this information to create your credit report, then sell your information to lenders that ask about your borrowing habits. However, they do not decide if you are a good or bad credit risk.
Experian, TransUnion, and Equifax are the big three credit bureaus that store your data, including your personal information, financial information, including any judgments, all past inquiries by lenders, and records of all of your lines of credit and loans. The credit scoring standard was designed by FICO.
According to data from Experian in the second quarter of 2019, the average FICO Score in the U.S. was 703, which is considered ‘good’ by most lenders. FICO scores range from 300 to 850, with anything above 800 considered ‘excellent’ and a credit score that falls below 579 considered ‘poor’.
Although FICO is the oldest scoring model, VantageScore is another common scoring model used to calculate credit scores. Both are used by the majority of financial institutions, and both use a range from 300 to 850 to determine your credit score and weigh five factors into the scoring model–
Not all loans or credit inquiries are reported at all three bureaus. That’s because each credit reporting agency has connections with different financial institutions. And, because data uploads vary from one credit bureau to the next, credit scores can vary for the same credit score type.
There are many reasons why your credit score can drop – and not all are crystal clear to most borrowers.
Rebuilding your credit is no easy task. Unlike starting from scratch, you now have to show lenders that you are once again a good credit risk, and in the future, you will make your payments as agreed.
Your credit score follows you forever. So, when your score drops, it can have a long-term negative effect on all your finances. But, situations change and sometimes paying all your bills on time isn’t an option. When that happens, contact your creditors and explain your situation. Most will understand and work with you through the rough patches. And, while you can’t change the past, you can show lenders how well you handle your credit accounts moving forward.
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