Prioritize financial stability, and gain insights into how credit reporting works to keep your score healthy.
Q: A little over 15 years ago, my husband and I faced big money problems. Shortly after buying our second house, he lost his job, and my part-time income was barely enough to cover our bills. Thankfully, my parents were able to help us get by and we didn’t lose our home. However, our credit really suffered, and we were unable to qualify for a car loan when we needed to replace our vehicle. Determined never to be in that situation again, we made a commitment to get out of debt. We’re incredibly proud of our progress. Now we never carry a balance on our credit cards, our savings accounts grow each month, and our only debt is our mortgage. However, about a year ago, I noticed my credit score dropped from the high 800s to the mid-600s. I monitor it several times a month and this situation is really bothering me. My credit report is accurate, I haven’t applied for credit in over a decade, and I have no late or missed payments. At first, I thought it would sort itself out, but my score hasn’t improved, and I’m unsure what to do. Any suggestions? ~Brenda
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A: Congratulations on overcoming the financial challenges you faced. It takes immense patience and continuous, diligent effort to regain stability after such a setback. It’s clear that the money skills you developed along the way are still benefiting you, despite the mysteries of the credit scoring system. After working so hard to improve your credit score, it can be both alarming and perplexing to see it suddenly drop for no apparent reason.
Whether it’s an error on your credit report, unnoticed identity theft, a shift in your credit utilization ratio, or some other nuanced factor affecting the scoring algorithm, various elements could be at play. Pinpointing the exact cause of a sudden credit score drop can be challenging, but it also presents several opportunities for improvement. To gain additional insights into how your credit score is calculated and identify potential factors that could help it rebound, here are some less common factors to consider.
Paying credit cards off before the bills are due
The most important factor for calculating your credit score is your payment history. Since your score serves as a tool for lenders to gauge the likelihood of being repaid, paying off revolving forms of credit — like credit cards or lines of credit — too quickly can mean that your payments aren’t accurately reflected along with your usage.
Credit accounts are reported to credit bureaus on a monthly basis. For some people, whether due to a fear of accumulating debt or their budgeting habits, they make frequent payments and never carry a balance. While this helps prevent debt and reap any loyalty points the credit card offers, it can lead to your usage being inconsistently reported.
Instead of paying off your credit cards between billing cycles, consider setting up a separate bank account specifically for paying your bills. Transfer the amount you would normally pay toward your credit cards into this account, let the funds accumulate over the month, and wait until you receive your credit card bill or line of credit statement before making your payment. This approach ensures that your credit behaviour is captured accurately.
High revolving limits and various types of loans
High credit limits on your credit cards and lines of credit that are disproportionate to your income can inadvertently skew your credit profile, even if your credit utilization ratio is low. For example, having a $45,000 credit limit on your credit card when your annual income is less than twice that amount could signal to lenders that you might struggle to repay additional credit if they choose to lend to you. Similarly, with a home equity line of credit (HELOC), lenders who fail to report it accurately to the credit bureaus as part of your mortgage could inadvertently affect your score due to the differing ways various types of loans are weighed in the scoring algorithm.
Informational credit scores versus true credit scores
Each credit bureau has its own scoring system, so it’s likely that you have at least two different scores. Moreover, it’s up to each lender to interpret your score and the information on your credit report as they evaluate your credit application. There can be significant differences between lenders and their lending policies. Try not to focus on the informational credit scores you obtain; instead, learn from them and endeavour to use credit as wisely as possible.
Focus on your overall financial well-being
The bottom line on fixing your credit score after it drops inexplicably
Credit scores change on an ongoing basis. A hidden change could occur due to the automatic purging of old information. Most details, good or bad, are removed from your credit history report six to seven years from the date of last activity, depending on where you live in Canada. In addition, as the information approaches the purge date, its impact on your score diminishes.
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