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Understanding Credit Score Drops and How to Improve Your Credit

At O1ne Mortgage, we understand that maintaining a good credit score is crucial for your financial health. Your credit score can affect your ability to secure loans, mortgages, and even impact your interest rates. If you’ve noticed a drop in your credit score, it’s essential to understand the reasons behind it and take steps to improve it. In this article, we’ll explore common reasons for credit score drops and provide actionable tips to help you boost your credit score.

Common Reasons for Credit Score Drops

1. Late or Missing Payments

Your payment history is the most significant factor in your FICO® Score, accounting for 35% of your score. Even one late or missed payment can negatively impact your credit score. If you are more than 30 days past due on a payment, credit issuers will report the delinquency to at least one of the three major credit bureaus, likely resulting in a drop in your score. To avoid this, make sure to pay all your bills on time.

2. Recent Applications for New Credit

Whenever you apply for a new line of credit, lenders will request a copy of your credit report. Each time you authorize someone other than yourself to check your credit history, a hard inquiry is recorded on your credit report, which could slightly affect your score. Accumulating too many hard inquiries in a short period can negatively impact your scores.

3. Increased Credit Utilization

Maxing out your credit card can cause a quick drop in your credit score. Your credit utilization ratio, the second most important factor in calculating your FICO® Score, increases when you use a large portion of your available credit. Aim to keep your credit utilization ratio below 30%, and for the best scores, below 10%.

4. Decreased Credit Limits

Having your credit limit decreased can increase your credit utilization ratio and negatively affect your credit scores. If a credit card issuer lowers your limit, but your balance remains the same, your utilization ratio will increase, potentially causing your credit score to drop.

5. Closing a Credit Card

Closing a credit card account can increase your utilization ratio and reduce the length of your credit history, both of which can impact your credit score. Unless the credit card has a high annual fee or tempts you to overspend, it may be beneficial to keep the account open.

6. Inaccurate Information on Your Credit Report

Regularly checking your credit reports is essential to ensure no inaccurate information shows up in your file. Mistakes can happen, and incorrect information on your credit report can cause your scores to drop. Dispute any inaccuracies with all three credit bureaus as soon as possible.

7. Major Events Such as Foreclosure or Bankruptcy

Events like foreclosure or bankruptcy can significantly harm your credit scores. Bankruptcy is the most harmful single event to a consumer’s credit, while foreclosure is second only to bankruptcy. Both events can disqualify you from certain types of borrowing in the future.

What Is a Good or Bad Credit Score?

On the FICO® Score range, which uses a scoring range of 300 to 880, a score from 670 to 739 is considered good. Scores above 739 are considered very good or exceptional. Scores below 669 are considered fair or poor. In 2022, the average FICO® Score in the U.S. was 714, according to Experian data.

Ways to Improve Your Credit Scores

1. Pay Your Bills on Time

Paying your bills on time is one of the most crucial steps to getting and keeping a good credit score. Set up automatic payments to avoid missing a bill, but ensure you have enough money in the connected bank account to avoid an overdraft.

2. Minimize Overall Debt

Avoid leaning on credit to buy items you can’t pay for in cash or can’t pay off by the end of the month. This keeps your payments manageable and your ongoing credit utilization ratio low. Aim to bring your credit card balance to $0 at month’s end.

3. Monitor Your Credit Regularly

There are many ways to check your credit score for free, including via Experian. Regular monitoring can help you identify dips in your score quickly and course-correct if necessary. Free credit monitoring from Experian can help you keep tabs on both your FICO® Score and credit report.

4. Avoid Applying for Unnecessary Credit Cards

Not only do some cards have pricey annual fees, but an abundance of cards might result in more spending than you can handle. Apply for new credit only when necessary.

5. Practice Responsible Spending Habits

Setting up a budget can help you spend within your means over the long term. Even a general budget that categorizes your spending into a few overall buckets can be beneficial.

Handling a Dip in Credit Scores

A drop in your credit score can be stressful, but it doesn’t have to be permanent. There are ways to bring your score back up and prevent another decrease in the future. To see personalized information on what caused your credit score to change, plus advice on credit moves you can make to increase your score, check your credit score for free through Experian.

Remember, credit scores are dynamic, and you have the ability to improve yours with your own habits—an empowering truth that you can apply to other parts of your financial life too.

Contact O1ne Mortgage for Expert Mortgage Services

At O1ne Mortgage, we are committed to helping you achieve your financial goals. Whether you need assistance with improving your credit score or securing a mortgage, our team of experts is here to help. Call us today at 213-732-3074 for any mortgage service needs. Let us help you navigate the path to financial success.

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