causes for a dropping Credit score
While you haven't figured out the reasons to explain why your credit score has been dropping over the last few months, there may be less-than-obvious changes to your credit profile which may have caused this drop.
Keep in mind that your credit score is essentially a predictive tool that evaluates your risk to a lender at a given time.
So there may be reasons why your score has been dropping that may not be apparent, but still are considered from a risk perspective.
The first step is to look at the negative factors returned with your current fico score.
A very common, yet not entirely obvious cause, for a score to drop is an increased utilization ratio. An increased what ratio? Yes, this is credit scoring lingo, but it basically measures how much of your credit are you using in relation to your total available credit.
For example, if you had 2 credit cards each with a $2,000 credit limit ($4,000 available credit) and you charged $500 on each ($1,000 balance), you'd have a 50% credit utilization ratio ($2,000 / $4,000 = 50%). In general, the lower this ratio, the better for your score. Therefore, if you've been using more of your available credit lately, that could account for a drop in your credit score. For a more detailed description of the credit utilization ratio, read this article.
Applying for new credit accounts, such as department store cards or lines of credit can also account for a small credit score drop.
Each time you apply for new credit, an "inquiry" is added to your credit report. Each of these inquiries can have a small impact on your credit score, and several inquiries in a short time frame will have a greater impact on your score than a single inquiry.
So, if you've recently been seeking new credit, this also may have caused your credit score to drop. Inquiries only account for up to 10% of your credit score and there are some exceptions so on inquiries and their relationship to your credit score.
Now that you know what a utilization ratio is and that seeking new credit can hurt your score, the next obvious question is why does your credit score care about these factors? The short answer is that research has shown that people who are using more of their available credit are more likely to miss future payments than those people using very little of their available credit.
In addition, research also indicates that a person who is actively seeking credit is more likely to miss future payments than a person with the same credit profile who is NOT seeking credit.
These two reasons may explain why your credit score has been dropping. Since you've noticed a steady decline over the last few months, it may be the case that you've been gradually using more and more of your available credit in addition to applying for new credit accounts.
This does not necessarily mean that you've become a credit risk - but these could be signs that credit trouble may be looming. If possible, pay down the balances on your credit cards and hold off from opening any new credit accounts. By doing this, you should see your credit score bounce back fairly quickly - as long as the rest of your credit profile remains unchanged.
However, if you cannot pay down your balances or if you find that you cannot make ends meet without finding additional credit, then you should take an honest look at your financial situation and determine if trouble might be on the horizon. You might benefit from speaking to a certified credit counselor who can help you figure out your available options
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