Your credit score can drop to 40 points for several reasons, including missed or late payments. However, identifying the cause of the point drop is essential to improve the score. When was the last time you checked your credit score? Was it a month ago? You must check it from a free credit scoring site and check if it has dropped to 40.
If you have applied for a new credit card, your credit score can drop. Closing an old account can cause the credit score to drop to 40 points. Moreover, a high credit utilization rate can suddenly decrease your credit score. It will also drop if you have written off the remaining debts timely.
Lack of account diversity is another reason for the credit score drop. A derogatory mark in your credit report can also lower your chance of qualifying for loans and credit cards, resulting in a lower score. So, you must find the reason behind the credit score drop to fix the problem as soon as possible.
Let’s find out why your credit score drops to 40 points and things you should do to improve it:
1. Late or Missed Payment
Your payment history is pivotal in increasing or lowering your credit score. A missed or late credit card payment causes a major score drop. Creditors or financial institutions check the credit score when lending money. They will refuse to give you loans or funds if they find you have a 40 credit score.
FICO reported that when an individual misses the 30-day credit card payment, the credit score drops from 17-37. However, a 90-day missed payment drops the score to 27 to 47 points.
How to Solve it?
The score drop on a missed payment will differ depending on your credit history and payment behavior. Your credit score will improve if you start paying the monthly credit bills timely. Moreover, keeping track of all your credit cards can take time and effort.
You cannot remove or hide the late or missing payment records from the credit report. However, you must make the payment as soon as you receive the “missed payment” message. Financial experts recommend enabling the auto payment feature to avoid missing or late payments.
When you clear the missing or late payments, it will show as “paid” in the credit report. Credit card holders must regularly check their monthly due dates from the bank’s mobile app or website. You can also set a reminder on your smartphone or tablet to avoid this problem.
2. Closed an Old Credit Card Account
Closing a credit card can reduce your 15% credit score. When you stop using a credit card and close the account, it reduces the remaining credit. It usually happens because the credit card issuer or bank removes the credit file when you close the account.
What is another problem with closing a credit card? Your credit accounts will expire earlier than the estimated date. The older an account, the more the credit score will drop. Hence, don’t close an old credit card account if it isn’t required.
How to Solve it?
Credit card users must calculate their credit utilization ratio. If it is incredibly high, reduce it by paying the due bills or opening a new credit card account. Furthermore, you can request the issuer for a credit limit increase.
3. You have Clear off a Debt
Most people don’t know that paying off a debt can cause their credit score to drop to 40 points. It might seem illogical, but this happens most of the time. So, you might be wondering how clearing off a loan can affect your credit score. It occurs due to the change in your credit mix.
Credit mix is responsible for 10% of your credit score. It will reduce your credit score if you have paid all the installment loans and are only left with credit card bills. So, pay off the loans and credit card payments timely to improve your FICO score.
4. Derogatory Items Addition to Your Credit Report
Creditors or lenders report the credit bureaus if you miss the monthly payments. Late payment is another reason for the derogatory mark on your credit report, reducing the FICO score to 40 points. Here are the other reasons why a financial institution or credit card issuer places a derogatory item on the credit report:
- Tax lien
- Bankruptcy
- Foreclosure
- Lawsuit
- Collection accounts
How to Solve it?
Derogatory marks on a borrower’s credit report remain for 7-10 years. Thus, you must know how to remove them to increase the FICO score—identify the underlying cause for the derogatory mark and solve it as soon as possible.
5. High Credit Utilization Rate
Your credit utilization rate also affects your credit score. FICO states that an individual’s credit utilization rate is responsible for 30% of the total score. The more you spend, the more your credit utilization rate.
CFPB recommends that credit card users keep the utilization rate between 20-29%, improving their credit scores. So, how can you reduce your credit utilization rate? Stop investing in luxurious or unwanted items if you have too many loans. Save the money to clear off the debts timely.
6. Low Credit Limit
A lower credit limit can drop your credit score to 40 points. It usually happens when your credit utilization rate increases for spending lower than usual. Thus, you must check your credit utilization rate if your credit score drops. Budgeting is the only solution to fix this problem. Reduce your credit card spending if you want to increase your FICO score.
7. Error on Your Credit Report
You are not responsible for the credit score drop all the time. An error in your credit report can reduce the FICO score to 40 points. Credit file errors can be fixed easily. Contact the credit bureaus if you notice a sudden score drop in your credit report.
Credit card holders must check which credit report they have an error. Open the credit bureau’s website and go through their online dispute process. They will verify all the details and correct the mistakes in your credit report. So, you must monitor your credit report regularly to avoid these unwanted errors.
8. A New Credit Card or Loan Application
Did you apply for a new credit card or loan? It will result in a hard inquiry in your report. Each hard inquiry will reduce the credit score drop to a few points. However, you don’t have to do anything to resolve the problem.
If you have applied for 1 loan, your credit score won’t drop to 40 or less points. Avoid applying for more than one or two credit cards or loans to maintain the FICO score. Opening a new credit card account or multiple lines of credit can reduce your credit score.
9. An NPSL Credit Card
Owning a NPSL credit card can be responsible for your low credit score. No Preset Spending Limit Credit cards have no pre-estimated spending limits. The card limit depends on the individual’s spending habits, credit history, income, and many credit cards he already owns.
Credit utilization rate increases, and the credit score decreases when a credit card has no spending limit. Thus, financial advisors recommend not applying for the No Preset Spending Limit cards. Get a credit card with the highest spending limit to increase your credit score.
10. Identity Theft
It is one of the most concerning reasons for a sudden credit score drop. If the bank or credit card issuer thinks someone is using your card, they will reduce the score and spending limit. Recent studies reveal that 1 out of 3 credit card holders experience identity theft.
Thus, you must always monitor your credit card transactions. If you notice an unrecognized transaction, immediately report it to the bank authorities or credit card company. They will take instant action to prevent unauthorized people from using your credit card.
Does Lack of Account Diversity Affect the Credit Score?
Lack of account diversity can cause your credit score to drop to 40 points. Apply for a credit loan without an expiration date and support different payment methods, including HELOC.
Additionally, you must combine credit loans with installment loans like student loans. These types of loans don’t have any preset payment date. So, using these financial products can help you to maintain your credit account diversity.
