Paying on time can help you maintain a strong credit score, but your score may go down even if you’ve never been late.
It can be frustrating to feel like you’re doing everything right only to end up with a low score. Here’s what you should know about other factors that affect your credit score, and why yours may have fallen.
Your credit score is more than your payment history
Payment history is the most important part, making up 35% of your FICO Score. However, that means 65% of your score is influenced by other factors.
The remaining categories are the amount you owe (30%), length of credit history (15%), new debt (10%) and mixed debt (10%). Paying on time but ending up with a high credit utilization ratio — the percentage of your available credit that you’re using — due to accruing interest can lead to a lower score. Applying for a loan, paying off the loan in full and closing an old account can also hurt your credit score.
Paying off a mortgage, auto loan or similar product in full is an accomplishment, but not having that loan anymore can hurt your credit mix and the average age of your credit accounts. In the long run, losing a few points is nothing to panic about.
Common reasons are that your credit score can fall without a missed payment
High balances on your credit card can hurt your credit score even if you pay them on time. Having a credit utilization ratio higher than 30% (such as carrying a $300 balance on a credit card with a $1,000 limit), can wreak havoc on your FICO score, and the minimum payments may not be enough to get you below that percentage.
Bad credit checks can also lower your FICO score temporarily. You face a tough credit check when you apply for a loan, credit card, rental unit or other credit product. Creditors do a hard credit check to review someone’s credit profile to check if they can keep up with the monthly payments.
Your score can drop if you open a new account or close an old credit card, as both actions lower the average age of your credit accounts. Reporting errors can also happen, which is why it’s important to check your credit report each year. You can do that for free.
What to do after your credit score drops
A low credit score is not always a bad thing, especially if you have just paid off a loan. However, if you want to apply for a loan, car loan or similar financial product, it is a good idea to increase your credit score. Paying off any revolving debt is usually the best place to start. Not only will you strengthen your already strong payment history, but you will also improve your credit utilization ratio.
If your credit score drops, you can review your credit report to find out what has changed. Then, fix any mistakes and continue to build the most important habits: paying on time, keeping balances under control and limiting how often you apply for new credit.
