I’m sure your credit score dipping is the last thing you expected to happen after you purchased your new car or concert tickets. But unfortunately, it’s not uncommon for your credit score to experience fluctuations, especially after significant financial transactions like a big purchase. In this article, we’ll dive into the factors that influence your credit score and explain why it may have dropped.
The Impact of Credit Utilization
Your credit score is a numerical representation of your creditworthiness, indicating to lenders how likely you are to repay borrowed money. It’s calculated based on various factors, including your payment history, credit utilization, length of credit history, types of credit accounts, and new credit inquiries.
One factor that significantly influences your credit score is credit utilization, which refers to the amount of credit you’re using compared to your total available credit. High credit utilization can indicate to lenders that you may be overextended and at a higher risk of default.
When you make a significant buy, such as financing a car or charging a high amount on your credit card, it can increase your credit utilization ratio. Even if you’re still well within your credit limit, the sudden spike in utilization could cause your credit score to decrease – usually temporarily.
Temporary Impact vs. Long-Term Effects
The drop in your credit will be temporary if you continue to make on-time payments and reduce your outstanding balance. Your credit utilization will decrease, and your score should gradually recover. However, if you consistently carry high balances or max out your credit cards, it could have a long-term negative impact on your credit score.
Taking Steps to Improve Your Credit Score
If you’re concerned about the drop in your credit score, there are steps you can take to improve it over time:
- Pay Down Balances: Focus on paying down the balance on the account where you made the big purchase to lower your credit utilization ratio.
- Make Timely Payments: Ensure that you continue to make all of your payments on time, as your payment history is a significant factor in your credit score.
- Keep Checking Your Credit Score: It’s a myth that checking your own credit score will lower it.
- Keep Your Accounts Open: Unfortunately, closing a line of credit can hurt the age of your credit accounts.
- Maintain a Nice Credit Mix: Having different types of credit accounts, like a car loan and a credit card instead of five different credit cards, can also improve your score.
When to Get Professional Guidance
If you’re still unsure about why your credit score dropped or how to improve it, don’t hesitate to seek guidance from a financial advisor or credit counselor. They can provide personalized advice based on your unique financial situation and help you develop a plan to achieve your credit goals. (Or, you can create a free account with Credit.com and get graded on each of the factors that impact your credit score.)
In conclusion, experiencing a drop in your credit score after making a big purchase is not uncommon. It’s essential to understand the factors that influence your credit score and take proactive steps to manage it responsibly. By monitoring your credit score regularly and practicing good financial habits, you can work towards building and maintaining a strong credit history for the future.