Reasons Why Credit Scores Drop: 10 Credit Score Killers

Maintaining a high credit score can help in your financial life. It unlocks the door to better loan terms and lower interest rates and even helps get approval when renting an apartment or purchasing a home. Yet, even if you think you have it all put together, some can encounter a sudden unexplainable dip in their score, leaving them wondering what they did that made their score drop.

1. Late or missed payments 

One of the main reasons why credit scores drop because of late payments. Even a seemingly insignificant late payment on a small bill can leave a surprisingly large mark on your credit report, potentially dropping your score by 70 points or more. Timeliness is the bedrock of a strong credit history, and every missed payment sends a message to lenders that you may not be a reliable borrower. This can hurt your credit score and restrict your access to loans, credit cards, and even rental agreements.

The good news? You’re in control! Here’s how to fix your late payments:

• Catch it early: Early intervention is key. Monitor your credit report regularly to spot any late payments as soon as they appear.
• Own the mistake: Contact the creditor immediately and explain your situation. Often, they’re willing to work with you to remove the late payment or negotiate a settlement.
• Prioritize future payments: Make timely payments on all your accounts, big and small. This positive track record will gradually repair the damage and boost your score.
• Seek professional help: If you’re struggling financially, don’t hesitate to seek help from credit counseling services. They can equip you with the tools and strategies to manage your debt and prevent future late payments.

2. High credit utilization 

Credit utilization is the percentage of your available credit limit that you’re currently using. It’s recommended to keep your utilization at a moderate level, ideally below 10%. This demonstrates responsible credit management and helps to maintain a high credit score. Few people realize that their credit utilization significantly impacts their credit score, making up a large portion of their overall creditworthiness. It’s the second most crucial factor after credit history, with a weightage of 30%. Therefore, if you’re paying off your credit cards but haven’t seen any improvement in your credit score, it may be worth checking your credit card usage to ensure your credit utilization is under control.

Here are the other ways you can manage your credit utilization:

• Track your utilization: Regularly monitor your credit report and credit card statements to stay aware of your utilization ratio.
• Pay down strategically: Prioritize paying down cards with high utilization first to improve your score quickly.
• Consider raising your credit limit: If you consistently maintain low utilization, increasing your credit limit can improve your score without affecting your utilization ratio.

3. Too many new credit inquiries 

Each new credit application triggers a “hard inquiry” on your credit report, which can temporarily affect your score. That is why it is always important to be mindful when applying for new credit. Having a lot of inquiries is also one of the reasons why credit scores drop. Even if it has minimal impact on your score, it often gets a bad reputation because using it for a lot of credit over a short time can give lenders the wrong impression that you need credit and may question your ability to pay back the debt. When these small inquiries add up, they will have a significant impact, and instead of getting you approved for credit, they may do otherwise.

4. Closing old credit accounts 

The length of your credit history is an important factor in determining your credit score. If you close accounts, it will shorten your credit history, which can have both positive and negative effects. Some closed accounts may have negative information attached to them that can still impact your score, especially if they contain late payments. This can make you appear to be a risky borrower. However, if an account that you close has a good payment history, it is best to keep it on your credit report.

Before closing any account, carefully consider the following:

• Account age and payment history: Prioritize keeping older accounts with a good payment history, as they contribute positively to your credit history length and score.
• Credit utilization: Analyze your overall credit utilization. Closing an account might significantly increase your utilization, potentially harming your score.
• Reason for closing: If you’re closing due to inactivity or fees, consider downgrading to a no-fee card instead. If closing due to negative marks, address the underlying issue before closing.
• Alternatives: Explore alternatives like debt consolidation or negotiating lower fees before resorting to closure.

5. Errors on your credit report 

Have you noticed accounts that are not yours reporting on your credit report? Inaccurate information is something that you would always want to look out for when monitoring your credit. These inaccuracies can sometimes mask your legitimate debts, making it harder for you to maintain a high credit score and to see what you actually owe.

The best way to avoid this is by getting a copy of your credit report or downloading the free apps like Borrowell and Credit Karma (Canada) to check your reports regularly. The faster you spot these errors and inaccurate information, the better it is for you to have it removed.

6. Identity theft 

Identity theft clearly poses risks to your credit. This is when someone opens accounts under your name and SIN. It will show up on your credit report, and if that person does not pay, you suffer the consequences of low credit.

Here are several impacts of Identity Theft on your Credit Score:

• Unauthorized Accounts: When someone steals your identity, they might open new credit cards, loans, or even utility accounts in your name. These fraudulent accounts show up on your credit report, negatively impacting your score.
• Missed Payments: Identity thieves often neglect to make payments on the accounts they open in your name. These missed payments lead to delinquencies and damage your credit score significantly.
• Debt Accumulation: The longer the identity theft goes undetected, the more debt the thief can rack up in your name. This can significantly decrease your credit score which will make it hard for you to apply for loans and other lines of credit.

7. Maxing out your credit cards 

Maxing out your credit cards will affect your credit in multiple ways. But the main thing that it’s going to have an impact on is your credit utilization ratio this is the amount of credit you owe versus the amount of credit you have available.

Lenders want to see responsible credit behavior, and keeping your utilization low showcases your ability to handle credit responsibly. It demonstrates:

• Controlled Spending: You’re not exceeding your limits and incurring potential debt burdens.
• Financial Planning: You can manage your finances within your means and don’t rely solely on credit.
• Budgeting Ability: You plan your spending effectively and avoid overspending temptations.

8. Having too many open credit accounts 

So, how many accounts are “too many”? It depends on various factors, but generally, aiming for fewer than 10 open accounts (excluding mortgages) is considered reasonable. Remember, quality over quantity! Prioritize maintaining good standing with established accounts over opening new ones unnecessarily.

Here are tips to manage accounts effectively to maintain a high credit score:

• Evaluate and Close Unused Accounts: Review your open accounts and close any you don’t actively use. Dormant accounts might still affect your score and overall credit utilization.
• Focus on Existing Accounts: Prioritize responsible credit management on your existing accounts by making timely payments and keeping balances low.
• Apply for Credit Strategically: Only apply for new credit when truly necessary and do so strategically to minimize inquiries’ impact on your score.
• Monitor Your Credit Report: Regularly review your credit report to address any potential errors that might be dragging down your score.

9. Not using your credit cards 

Lenders rely on your credit history to assess your creditworthiness. This history includes, among other things, your track record of using credit responsibly and making timely payments. When you don’t use your credit cards at all, lenders lack evidence of your ability to manage credit effectively, resulting in potential score dips.

By using your cards strategically and making sure lenders have evidence of your financial responsibility, you can avoid credit score drops and even potentially improve your credit standing.

10. Cosigning on a loan 

Cosigning a loan essentially binds your financial fate to the borrower’s. This means you become equally responsible for repaying the loan in full, with all its terms and obligations. While it can help someone secure a loan they wouldn’t qualify for on their own, it carries significant risks for your credit score. Unmanaged co-signed loans are one of the reasons why credit score drops.

Before putting your financial health on the line, carefully consider the following:

• Borrower’s Creditworthiness: Scrutinize the borrower’s financial history, income stability, and ability to manage existing debt.
• Open and Honest Communication: Discuss the loan terms, repayment plan, and potential consequences of default openly and honestly with the borrower.
• Have a Backup Plan: Consider what you will do if the borrower defaults and you have to shoulder the burden of the loan.
• Seek Professional Advice: Consulting a financial advisor can help you understand the full implications of cosigning and assess your financial risk.

What to do 

• If your credit score has dropped, there are steps you can take to improve it. 
• Start by reviewing your credit report and disputing any errors. 
• Then, focus on making all of your payments on time and keeping your credit utilization low. 
• Over time, your credit score should start to improve

Help for Canadians

At Kenny Johnson University, we understand that repairing credit can be a challenge for Canadians. We offer comprehensive credit repair services to help you achieve your financial goals. Our team of experts will work closely with you to identify and address any negative items on your credit report, develop a personalized credit improvement plan, and guide you through building a more robust credit profile.

Here’s what sets us apart:

• Experienced and knowledgeable team: Our team comprises of specialists who are passionate about helping Canadians overcome credit challenges.
• Personalized approach: We tailor our services to your unique needs and circumstances to ensure the most effective results.
• Transparent and ethical practices: We believe in honesty and transparency throughout our process.
• Convenient contact options: Reach us via email, live chat, or phone call to discuss your specific credit situation and receive personalized advice.

Ready to take control of your credit and unlock a brighter financial future? Contact Kenny Johnson University today!