So you paid your bills on time every month and you were never late. Yet your credit score seems to be dropping. Which give?
The higher your credit score, the easier it is to borrow money affordably when you need it. And so, a series of minor credit score hits could become problematic.
But there are different reasons why your credit score may drop, even if you’ve done a great job paying your bills on time. Here are a few you should know.
1. You have large balances on your credit cards
Paying your credit card bills on time each month is an important step towards maintaining good credit. But even if you do that, if you owe too much on your credit cards, your score could take a hit.
Besides your payment history, your credit utilization rate is the most important factor in determining your credit score. And so, if you owe a lot on your credit cards compared to your total spending limit, your score could be affected.
As a general rule, to avoid an impact on your credit score, you should keep your utilization rate at 30% of your total spending limit on your various credit cards. So if you have a total spending limit of $10,000, you don’t want the balances you’re carrying to exceed $3,000.
2. You ask for too many credit cards
Each time you apply for a new credit card, you will have a thorough investigation of your credit report to ensure that you are not an overly risky borrower. A single serious inquiry will typically result in a five to 10 point impact on your credit score. And it’s not that bad. But multiple difficult requests could have more of an impact, which means that if you don’t space out your credit card requests, your score could drop.
Your credit composition is another factor used to calculate your credit score, and it depends on the different accounts you have. If your credit mix consists of eight or nine different credit cards and no other type of loan, it could have a bad impact on you from a borrowing risk perspective.
3. You close older accounts
The length of your credit history also comes into play when determining your credit score. If you’ve opened new credit accounts and closed old credit cards, your score could suffer if you leave yourself with a shorter credit history.
That’s why it’s often a good idea to keep old credit cards open, even if you don’t actually use them. The only exception is if you are charged an annual fee. These are usually not worth paying for a card that you basically keep hidden in a drawer somewhere.
Now that you know some of the sneaky reasons why credit scores drop, you can take steps to keep yours in good shape. That could mean not having such high balances on your credit cards, not asking for too many credit cards in a short time, and keeping old cards open even if you’re mostly done with them.
Check out The Ascent’s best credit cards for 2022
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