Have you ever checked your credit score and found it dropped by 25, 50, or even 100 points for no reason at all?
Well, on this week's Podcast, I'm going to reveal the causes of these mysterious drops and what you can do about them!
Over the years, I've had a lot of people reach out to me in a panic because their scores dropped by 50 or 100 points "overnight." They feel scared and frustrated, especially if they've worked hard to improve their credit.
In my experience, when one of these sudden and unexpected credit score drops happens, most people assume it's a sign of financial disaster. They think it's a major bank error, like the one that almost cost me my house, or it's a sign of fraud, and while that sometimes is the case, more often than not, there's a simple explanation, and the problem can be easily fixed.
The key is not to panic. If you act calmly and quickly to review your credit report and identify the cause, you can address the issue and bounce back fast!
HOW THIS RELATES TO US
For anyone new to credit repair, the factors determining your credit score are usually split into five categories: payment history, credit utilization, length of credit history, new credit, and credit mix.
Changes to any of these factors can cause credit scores to drop. When a drop is sudden and unexpected, there are several common reasons why:
Reason #1: A Reporting Error
79% of credit reports have errors, and different errors can do different levels of damage to scores. For example, if a payment was incorrectly reported as "late" or an account had the wrong balance details, it could cause an unexpected drop.
Reason #2: An Account You Didn't Know About Went To Collections
If, for example, you have medical debts you didn't know about or thought your insurance company already paid, your score can take a steep drop when that debt goes to collections.
Reason #3: Identity Theft
If someone opens a line of credit in your name, maxes it out, and doesn't pay the bill, that's a serious problem. The sudden drop in your credit score becomes a blessing in disguise because it acts like an alarm, letting you know to review your credit report immediately.
Reason #4: Credit Utilization
Other than a reporting error, it's the most common reason for credit scores to drop unexpectedly. The good news is it's the easiest problem to fix.
An example of this just happened to a friend of mine. My friend recently called me because her score dropped 56 points overnight. She said it was 715 one day and 659 the next, and she was panicking. She was certain it was identity theft.
She said she worked for over a year to boost her score from the 500s to the 700s. She had a few credit cards, but her utilization was below 30%. She was paying her bills on time and didn't apply for any new lines of credit.
So, we pulled up her 3-bureau report and reviewed it, looking for errors and signs of fraud. But everything looked normal – except one thing.
One of her credit card balances was much higher than the previous month.
In fact, most of her credit cards had zero balances, and the only one with a balance was nearly maxed out. I asked her about it, and she said she used the card to pay for a trip, but she thought that was okay because she already made her first-month minimum payment, and her overall utilization was still below 30%. Bingo!
I explained that even though her overall credit was below 30%, that 30% was all on one card, and the high credit utilization on the one card was probably why her score dropped.
We reviewed the rest of her reports to make sure that was the only issue. I warned her about the trap of making minimum payments and helped her form a plan of action.
She adjusted her repayment strategy, applied for credit limit increases on her cards, and guess what? Her scores were back above 700 within a month.
THE THING TO REMEMBER
Credit scores are very sensitive to certain types of changes. Payment History and Credit Utilization alone make up 2/3rds of your entire score.
So, even if you think you're doing everything right, all it takes is one or two minor changes to your recent activity to trigger a drop.
Although these sudden drops in credit scores can be scary, the sooner you respond, pinpoint the cause, and address it, the faster you recover.
WHY THIS IS IMPORTANT
The cause of an unexpected credit score drop determines the solution.
If you review your reports, know how credit scores work, identify the cause, and take simple actions to resolve the issue, you can bounce back and avoid any serious long-term effects.
If you aren't applying for credit or making a major purchase any time soon, you might think an unexpected 50-point drop is not a big deal.
But until you learn the cause of the drop, you don't know how serious the situation is.
Every month, your credit profile has new information reported. Any negative items added to the report can damage your financial health, and it needs to be investigated immediately, especially if it's out of nowhere.
WHAT YOU NEED TO KNOW
If you find yourself in a situation where your credit score drops suddenly and unexpectedly, there are five simple steps for how to respond:
STEP 1: Review Your Credit Reports
Review your credit reports for any new negative items that could drop your score.
If you know your credit score dropped, you probably already have access to your most recent credit reports, but if you don't, you can request Free copies at AnnualCreditReport.com.
When you have your reports, compare them and note any changes, increased balances, new late payments, collection accounts, or hard inquiries you weren't expecting.
STEP 2: Dispute Reporting Errors
If you notice any reporting errors, even if they aren't the cause of the unexpected drop, flag them and begin the dispute process immediately.
If you're thorough, you might end up with a higher credit score than the one you started with!
If you see an error you don't know how to dispute, you can scroll through my channel and find a video that tells you exactly how to remove it.
STEP 3: Report Suspicious Activity
If you see any suspicious activity, names or addresses you don't recognize, or accounts you don't remember opening, that may be a sign of fraud or identity theft. Report it immediately.
For more information, check out my episode 8 Simple Steps for Removing Identity Theft from Credit Reports!
STEP 4: Reduce Credit Utilization
Reduce the amount of available credit you use, AKA your credit utilization. Get it below 30% overall, and if possible, reduce it to below 30% with each line of credit.
Paying down credit card balances and requesting credit limit increases will help reduce utilization rates.
STEP 5: Avoid Applying for New Credit
Hold off on applying for any new credit until your score recovers to avoid further hard inquiries.
STEP 6: Monitor Your Credit
Check your credit score monthly to ensure it rebounds. You should see improvement within one or two billing cycles.
If you stay calm, act quickly, and follow these steps, you can minimize any long-term damage and get your credit score back on track fast!
And if you want 6 months of Credit Repair Cloud software for FREE, plus access to our advanced disputing and business courses, sign up for our Masterclass!
MY FINAL POINT
An unexpected credit score drop can be scary, but with some credit knowledge and a plan of action, you can undo the damage just as fast. Don't let a minor setback keep you from reaching your credit goals.
I'LL END BY SAYING
If you still need a Credit Repair Cloud account, check it out. It's the software that most Credit Repair businesses in America run on. Sign up here for a Free Trial!
And if you'd like to change lives and grow your Credit Repair business, check out our Credit Hero Challenge!
It's an amazing program, and we've got another challenge starting in a few days, so grab your spot right now at CreditHeroChallenge.com!
So take care, Credit Hero!
And Keep Changing Lives!