Look to score factors for culprit in 100-point loss

This post originally appeared November 10, 2016 on CreditCards.com as “Find the reason for a sudden 100-point credit score drop

By Barry Paperno

Dear Speaking of Credit,
My TransUnion score dropped by almost 100 points because of a credit inquiry and a collection that was removed. I’m confused. I thought it would rise because of the removal and I know one inquiry wouldn’t drop it that much. Help me understand what’s going on please? – Tanika

Dear Tanika,
I can see why you are puzzled. You’re right that an inquiry alone won’t lower a score by that much. On average, an inquiry tends to ding your score by about 5 points. But 100 points? Wow. Something else is going on. Let’s try to figure it out.

It’s understandable to expect your score to rise, not drop, when a negative mark such as a collection is removed. Yet credit scoring doesn’t always work that way. Thanks to the often quirky nature of these formulas, a better-looking credit report doesn’t always yield a better score. Credit scoring formulas give more weight to recent events than to older ones. That’s why it’s normal to see no scoring change with the removal of a collection, if more-recent collections, late payments or other negatives remain.

Score factors (reason/adverse action codes)
Rather than guess at a reason for your score loss, you should look a little more deeply into your credit report to help you understand your score. Your credit report should include the score factors, also known as reason codes or adverse action codes. These factors are included along with every credit score delivered – regardless of the score model or credit bureau – and apply specifically to that score.

Up to five score factors are listed for every credit score. Each one points to an area where the score could have been higher. What’s especially helpful is that these critical factors are listed in order of the impact they’re having on the score. The one with the most impact is listed first, next-highest second and so on.

Using score factors
By comparing sets of score factors along with the corresponding scores, you can often see how certain pieces of the scoring puzzle might fit together differently following a change on the credit report.

Did you keep a copy of the earlier credit score? If you did, that gives you a diagnostic tool.

Put the old score and the new one side by side. Compare the set of score factors that accompanied the first (higher) score with those that accompanied the second (lower) score. With the point loss you have experienced, you can expect to see some rearrangement of the factors or at least one or two not seen before.

Let me illustrate with an imaginary pair of score factors:

First, higher score

  1. Length of credit history is too short
  2. Too many accounts with balances
  3. High proportion of balances to credit limits on revolving accounts
  4. No recent installment loans

Second, lower score

  1. Serious delinquency on account
  2. High proportion of balances to credit limits on revolving accounts
  3. Time since delinquency is too recent
  4. Length of credit history is too short

This comparison provides us with at least a couple of valuable facts pointing to a score reduction:

  • At least one account recently became delinquent, and
  • Total credit card debt increased as a proportion of available credit.

We know this because “Serious delinquency on account” appeared for the first time as the first score factor accompanying the lower score, while “High proportion of balances to credit limits on revolving accounts” moved up from third to second place when going from the higher to lower score – indicating more of a negative role in the score.

The usual scoring suspects
If the scoring factors do not provide an explanation, the culprit may be found among the usual suspects. These are the three most common detriments to a high score:

1. Missed payments (Payment history scoring category – 35 percent of the score)
From a score in the upper 600s, a single late payment can lower a score by as much as 80 points, while a score in the high 700s can fall by more than 100 points.

2. High card balances (Amounts owed scoring category – 30 percent of the score)
A newly maxed-out card can take up to 50 points off a high score, or a loss of 10-30 points from a lower score.

3. New accounts/inquiries (New accounts scoring category – 10 percent of the score)
If that recent inquiry on your credit report resulted from a credit application that was approved, the addition of a new account and inquiry can leave you with fewer points.

None of the above? Look for errors
If none of these changes apply to your latest credit report, there could be a reporting error of some kind. Order your TransUnion credit report at AnnualCreditReport.com, review it for errors, and dispute any you find according to the instructions on the reports. Then, just to be on the safe side, repeat for your Equifax and Experian reports. Good luck!

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