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So you’ve been paying your bills on time every month and you’ve never been late. Yet your credit score seems to be dropping. What gives?
The higher your credit score, the easier it is to borrow money affordably when you need to. And so a series of smaller credit score hits could become problematic.
But there are different reasons why your credit score may be dropping, even if you’re done a great job of paying bills in a timely manner. Here are a few you should know about.
1. You’re charging up large credit card balances
Paying your credit card bills on time every month is an important step toward maintaining good credit. But even if you’re doing that, if you owe too much on your credit cards, your score could take a beating.
Aside from your payment history, your credit utilization ratio is the most important factor in determining your credit score. And so if you owe a lot on your credit cards relative to your total spending limit, your score could get dinged.
Generally, to avoid a credit score hit, you’ll need to keep your utilization ratio to 30% of your total spending limit across 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’re applying for too many credit cards
Each time you apply for a new credit card, you’ll have a hard inquiry done on your credit report to make sure you’re not too risky a borrower. A single hard inquiry will generally result in a five- to 10-point hit to your credit score. And that’s not such a big deal. But multiple hard inquiries could have more of an impact, which means that if you aren’t spacing out your credit card applications, your score could take a dive.
Your credit mix is another factor that’s used to calculate your credit score, and it speaks to the different accounts you have. If your credit mix consists of eight or nine different credit cards and no other types of loans, that could reflect poorly on you from a borrowing risk perspective.
3. You’re closing out older accounts
The length of your credit history also comes into play when determining your credit score. If you’ve been opening up new credit accounts and closing older credit cards, your score could take a hit by virtue of you leaving yourself with a shorter credit history.
That’s why it’s often a good idea to keep older credit cards open, even if you aren’t really using them. The only exception is if you’re being charged an annual fee. Those usually aren’t worth paying for a card you basically keep tucked away 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 carrying such high balances on your credit cards, not applying for too many credit cards in short order, and keeping older cards open, even if you’re largely done with them.
Check out The Ascent’s best credit cards for 2022
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