Credit scores are an important part of our lives. A good score helps determine a lot of things, like our eligibility for personal loans or ability to apply for credit cards. Having a high score, for instance, demonstrates to lenders that you’re a trustworthy person paying their bills on time. It helps establish a life of credit history to help companies assess the “risk” of offering a loan or a certain pay rate.
But if your credit score has abruptly dropped, don’t panic. Credit scores can drop for a variety of reasons. However, they mostly deal with unpaid bills, typically credit card charges or otherwise. So, let’s quickly examine a few reasons your score might have abruptly taken a negative dive.
Reasons for Credit Score Drops
- Reason #1: Late Credit Card Payment
If you have dozens of bills to juggle per month, it’s okay if you missed one. Things can happen. But, unfortunately, if you’re late on paying a card bill, it can adversely affect your score. The longer you don’t pay off the bill, the worse the credit drop will be (and you’ll accrue late charges which makes things more expensive).
- Reason #2: Hard Credit Inquiries
Not every drop in credit relates to missed bills. If you ever officially apply for a credit card or even a loan, for example, that’s called a hard credit inquiry. That’s basically when a company takes a look at your overall credit score, noting history, payment timeliness, debts, collections, judgments, and so on.
There are also soft credit inquiries and those don’t “hit” as hard, but you don’t want those to add up in frequency in a short period.
- Reason #3: Collections
Nobody wants debt to go into collections. But times are tough, and some are left feeling they have no choice but to simply not pay a bill. When that happens, a company has to charge off the debt which then gets legally acquired by a debt collector agency. Said agency will attempt to pursue the debt, usually by email, but in extreme scenarios, they can pursue court action.
Collections can happen for any amount, too. So, even that old bill for $130 from years ago you forgot about can still appear on your report.
- Reason #4: Judgments, Liens, and/or Tax Levy
A judgment, lien, or levy is when legal action is pursued to acquire a debt amount through a court order. This isn’t like a “collections”, this is when a representative of the debt has the legal authority to take money until a debt is satisfied. A judgment, for example, means wages can be garnished. Liens or levies are related to taxes, and that’s when the IRS is taking taxes owed.
These all appear on credit reports and can have a harsh effect on your score.
Keeping a Good Score
It’s okay to make financial mistakes. Financial hardship is a reality many people have to face. Make sure you don’t take loans you can’t pay back, and if you’re having trouble paying a debt, try to work with the agency you owe to. Even debt collectors can be surprisingly friendly and routinely offer major discount settlements to pay a debt without ever charging it off!
By doing so, you’ll prevent random drops in credit which can lead to further complications down the road.