Credit Scores! What Causes Them to Drop?

Credit scores are a mystery to many people and we hear lots of things about what causes a credit score to drop right before we are tying to buy a new house or new car. While I am not a financial analyst or financial guru, I do understand the basics of credit scores and credit management.

One of the biggest myths around credit scores is the idea that everytime you have your credit checked (or what some people refer to as a "hard check"), your credit score is negatively affected. I hear this all the time. Smart people that have been told things that simply are not true. And banks sometime promote this fear also (after they run your credit scores, not before they run your scores) so that you are afraid to go to another lender and have them also give you a competitive quote. Bankers and Brokers should know better; maybe they do and they are just tell you something that they know will keep you from talking to other brokers. Or maybe they don't know what causes credit score to drop--so they use this as a stick to scare you. Either way, they are really not telling the truth about what causes credit scores to drop.

One word sums it up and explains why credit scores drop--RISK. If you are doing risky things with your money or statistically doing things that look risky based on the thousands of financial profiles and actuary data of hundreds of thousands of individuals. The credit companies profile your risk of being able or willing to pay back your loan based on both your financial capcity, your financial behavior and your potential for future spending (i.e., your collective credit limit). Your credit risk is profiled and quantified and ultimately boiled down to a number.

So, what kind of behavior affects the number? 
  • Amassing credit cards increases your risk
  • Increasing your credit limits
  • Pushing your debt limits closer to your current income
  • Applying for multiple credit cards at one time
  • Not paying your bills on time
  • Changing jobs or occupations often
So, all the stuff your mother told you not to do when you starting moving out on your own--those are the things that are causing your credit score to drop. Going out this week and having 3 mortgage bankers check your credit score for a new home loan should not have any negative affect on your credit score and if it does, you should find out what else you are doing that is affecting your credit, because more than likely, you have some issues that need to be addressed and it is not the fact that you are talking to multiple lenders to buy a new home. If that triggered something in your credit report or credit score, you may be living too close to the edge and may need to take a look at how you are managing your finances overall. Don't put your finances at risk. When you get your credit scores, if your scores are low, see what you are doing that is affecting your credit scores and how you can better manage your risks.

My best to you and as always, if I can help you, your family or your friends, please do let me know.

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