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Sep

2024

Why Did My Credit Score Drop 30 Points for No Reason?

By Lauren Ward | Credit, relay | Comments Off

While some fluctuations in your credit score are normal, that may not be much comfort if yours drops by 30 points. Take a deep breath, and remember that there are several possible reasons for a dip. Perhaps a few of your loan payments have been late, or you’ve recently had to charge a lot on your credit card. Or maybe it’s because of factors outside of your control, like an error on your credit report or identity theft.

In any case, it’s a good idea to investigate why your credit score dropped 30 points so you can help get your finances back on track. Here’s what to know.

Why Did Your Credit Score Drop 30 Points?

You may be thinking, Why did my credit score drop 30 points when nothing changed? The truth is, something triggered the dip, so it’s time to start digging. The first step is to review your credit report from each of the three national credit reporting agencies: TransUnion, Equifax, and Experian. You can check your credit report for free once a week; visit AnnualCreditReport.com to get started.

Review each report carefully, starting with the most recent activity and working your way back. There may be discrepancies between reports, so give each one a thorough read. If you spot inaccuracies, you can take steps to dispute them.

Track your credit score with SoFi

Check your credit score for free. Sign up and get $10.*

Should You Be Worried About Your Credit Score Dropping?

An occasional, slight drop in your credit score is probably not worth losing sleep over. After all, small dips tend to be temporary. However, a 30-point drop could be enough to bump you to a different credit score range, such as going from “fair” to “poor.” And that could affect whether you’re able to get approved or receive favorable terms for a loan or credit card.

Reasons Your Credit Score Went Down

Here are some of the most common reasons why credit scores fall.

Increased Credit Utilization Ratio

If you’ve been racking up purchases on your credit cards lately, you may have increased your credit utilization ratio — or the amount of available credit you’re using. Fortunately, there are a few ways to lower your credit utilization, such as paying down your debts.

Missed Monthly Payment

Go 30 or more days without making a payment, and the lender may report your delinquency to the credit bureaus.

Disputed Credit Report

Formal credit disputes can cause your report to be under dispute, which can cause a temporary drop.

Multiple Credit Applications

Each time you apply for credit, the lender performs a hard inquiry, which can knock a few points off your score. To help protect your score from getting dinged, avoid applying for multiple credit cards within a short time frame.

Credit Report Error

Mistakes happen, and sometimes another person’s late payment gets logged on your account. If you do find any errors, dispute them.

Identity Theft

Someone else may have opened a credit account in your name and run up charges. The more debt you have to your name, the lower your score may be.

Closed Credit Card Account

When you close out an account you’ve had for a long time, you run the risk of lowering the average age of your accounts. And that accounts for 15% of your credit score.

Bankruptcy or Foreclosure

Bankruptcy and foreclosures can deliver a major blow to your credit score and stay on your credit report for seven to 10 years.

What Can You Do If Your Credit Score Dropped by 30 Points?

If your credit score fell by 30 points, there are steps you can take to start building it back. One of the most important things you can do is ensure you’re paying your bills on time, every time. A spending app can help you manage bills. Other strategies include paying down debts, managing how much available credit you use, and maintaining a diverse credit mix.

Recommended: Why Do I Have Different Credit Scores?

Examples of Credit Score Dropping

Let’s take a look at some scenarios when you may see your credit score fall.

One example is sending in a payment 30 days after the due date. Even if you have an otherwise perfect track record, a late payment could shave as many as 100 points off your credit score, depending on your score.

Another situation when your score might drop is when you apply for a loan or new credit card and the lender performs a hard inquiry. Each inquiry could cause your score to fall by five points or more, and it may stay on your credit report for up to two years. However, when FICO™ calculates your score, it considers only credit inquiries made within the last 12 months.

How to Build Credit

As we mentioned, paying bills on time, diversifying your credit mix, whittling down debt, and managing your credit utilization ratio are all ways to help build your credit score. But there are other steps you can take to boost your numbers.

One strategy is to be added as an authorized user on someone else’s credit card. Just be sure that person is someone you trust, has a good credit score, and responsibly manages the account.

Another option is to open a secured credit card. With secured credit cards, you put down a certain amount of money that acts as a security deposit. You get that same amount to spend as a line of credit. You can rebuild credit by making on-time payments each month.

You may also be able to help improve your credit score when you take out an installment loan, such as a personal loan or car loan. Besides giving you the opportunity to make regular, on-time payments, a loan can diversify your credit mix and lower your overall credit utilization.

Recommended: How Long Does It Take to Build Credit?

Allow Some Time Before Checking Your Score

It’s understandable to expect your credit score to tick upward right after you start taking positive actions. But change won’t happen overnight. In fact, it can take 30 days or more for your credit score to update and reflect payments you’ve made.

Closing a Credit Card Account Can Hurt Your Score

Sometimes the reason why your credit score drops by 30 points is because you closed a credit card you’ve had for a long time. After you’ve consistently paid your bills on time and knocked out the balance, consider keeping the card open. The length of your credit history impacts your score, and closing a card can bring down the average age of your accounts.

What Factors Impact Credit Scores?

What affects your credit score? Many factors, but let’s take a look at the five biggest ones and how much they impact your FICO score. (It’s used in 90% of lending decisions.)

• Payment history (35%)

• Amounts owed (30%)

• Length of credit history (15%)

• New credit (10%)

• Credit mix (10%)

Pros and Cons of Tracking Your Credit Score

Except for the time it takes to get your credit report, there aren’t many reasons why you wouldn’t want to keep tabs on your credit score. The benefits, however, are many. You can spot errors or issues early on and start taking the appropriate steps to remedy the situation. You’ll also have a better idea of your current credit status and what potential lenders will see on your credit report.

How to Monitor Your Credit Score

One of the easiest ways to get credit score updates is to sign up for a service online. There are numerous companies offering safe, reliable credit score monitoring.

It’s also worth noting that you can check your report without paying. Banks, credit unions, and credit cards often offer free credit score updates to customers.

The Takeaway

If your credit score dropped 30 points, it’s a good idea to investigate why. Changes in your credit utilization or credit mix, applying for multiple lines of credit at once, late payments, errors, and identity theft could all cause a dip.

A good first step is to check your credit report and dispute any errors. At the same time, you can practice sound financial habits, like paying bills on time, monitoring how much of your available credit you’re using, and keeping older accounts open.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

Why is my credit score going down if I pay everything on time?

There are multiple reasons your credit score could go down even if you’ve paid your bills on time. For example, has your credit utilization ratio gone up? If you just used your cards for some big transactions and increased the amount of debt you carry, that may be the reason your score dropped.

Why did my credit score drop 30 points when nothing changed?

Your credit score can drop 30 points for a variety of reasons. A good first move is to check your credit reports; you can receive them for free each week. Look for any unfamiliar activity, and dispute errors with the credit bureau.

Why did my FICO score go down for no reason?

Any change to the factors that go into your FICO score could prompt a drop. That said, one common reason is a change in your credit utilization ratio. Even if you pay your bills on time, a rise in debt could cause your score to fall.

Photo credit: iStock/MStudioImages

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL-Q324-007

Sep

2024

Can DACA Recipients Apply for Student Loans?

By Pam O’Brien | Going to College, Student Loans, student_loan | Comments Off

DACA recipients who are planning to go to college and need financial assistance can apply for certain types of student loans. DACA (Deferred Action for Childhood Arrivals) provides undocumented citizens who came to the U.S. as children with protections and opportunities, such as applying to colleges and taking out specific types of student loans.

Learn more about the loans DACA recipients may be eligible for (sometimes referred to as DACA student loans), and discover other types of financial aid that could help make college more affordable.

Overview of DACA and Student Aid

There are more than 180,000 DACA-eligible college students in the U.S., according to the most recent data from the American Immigration Council. Approximately 85% of these students are enrolled in public colleges and universities.

DACA recipients are not eligible for federal student loans or other federal aid, but they may be able to take out private student loans as long as they meet the eligibility requirements. DACA recipients may also qualify for scholarships and grants, financial aid from their state, and aid from the school they’re attending.

Currently, 25 states and the District of Columbia provide access to in-state tuition to undocumented students, including DACA recipients. These students qualify for in-state tuition rates, which are typically much less expensive than out-of-state tuition rates.

In five states, only DACA recipients get access to in-state tuition; other undocumented students do not. Nine states block in-state tuition access for all undocumented students, including DACA recipients, and three states prohibit undocumented students from enrolling in some or all public colleges.

Federal Student Loan Eligibility for DACA

DACA recipients cannot take out federal student loans offered by the Department of Education. To qualify for federal student loans, an individual must be a U.S. citizen, a legal permanent resident, or meet special criteria that classifies them as a member of a small group of eligible noncitizens (residents of American Samoa, for example).

However, there are other kinds of financial assistance for college that DACA recipients can pursue. They may be eligible for certain types of financial aid, including funding or scholarship programs from their college and state of residence. And there are some student loans for DACA recipients, such as private student loans, these students can explore.

FAFSA and DACA Students

To be considered for aid from their state or school, it’s generally recommended that DACA recipients fill out and submit the Free Application for Federal Student Aid (FAFSA) as long as they have a Social Security number (SSN), which is required for the form. If they opt to fill out the FAFSA online, they’ll also need their SSN to set up an account at studentaid.gov.

When they get to the section of the form that asks about citizenship status, DACA recipients must choose the “neither U.S. citizen nor eligible noncitizen” answer. State of residence is the state where they have their permanent home.

The FAFSA will typically be processed within three days if it is submitted electronically and within 10 days if submitted on paper. Once the Department of Education has processed the form, the information will be sent to their school, which will then determine what kind of student aid they might be eligible for.

Private Student Loan Options for DACA

DACA students may be able to take out private student loans. These loans are offered by banks, credit unions, and private lenders. Private student loans have fixed or variable rates, and the rate an individual might qualify for depends on their credit history, among other factors. This guide to private student loans provides more information on how these loans work.

In order to qualify for private student loans, DACA recipients may need a student loan cosigner who is a U.S. citizen or permanent resident. The cosigner agrees to repay the loan if the borrower defaults or is unable to pay their debt.

If an applicant doesn’t have a cosigner, it might be possible to find some private student loans for DACA students without a cosigner. As with any loan, it’s important for the borrower to make sure they’re comfortable with the rates and terms. And keep in mind that, as a borrower, you could choose to refinance student loans at some point in the future to obtain a lower rate or better terms at that time.

Finally, it’s important to note that with private student loans, a borrower doesn’t have access to the same federal protections and programs borrowers with federal student loans have. This includes federal forgiveness programs and income-driven repayment plans. Some private loans do offer private student loan forgiveness, so it can be wise to ask a lender if that’s an option.

Institutional and State Aid for DACA

Student loans aren’t your only option for paying for college as a DACA recipient.

Nineteen states plus the District of Columbia offer some financial aid or scholarships for DACA recipients and undocumented students. The states are:

• California

• Colorado

• Connecticut

• Hawaii

• Illinois

• Maryland

• Massachusetts

• Minnesota

• Nevada

• New Jersey

• New Mexico

• New York

• Oregon

• Rhode Island

• Texas

• Utah

• Vermont

• Virginia

• Washington

These same states also provide access to in-state tuition for DACA recipients and undocumented students. As mentioned, in-state tuition rates are typically much less expensive than out-of-state tuition rates.

Six other states give DACA recipients and undocumented students access to in-state tuition. These states are:

• Arizona

• Florida

• Kansas

• Kentucky

• Nebraska

• Oklahoma

Many schools also offer institutional aid to DACA recipients. For instance, Bates College in Maine, Emory College in Atlanta, and Occidental College in Los Angeles are just a few of the schools across the country that meet 100% of the demonstrated need for undergraduate undocumented students, including DACA recipients. Check with prospective colleges to find out what their policies are.

DACA recipients may also apply for scholarships through such programs as Golden Door Scholars, which provides scholarships for undocumented students studying for careers in STEM, nursing and business, and TheDream.US Scholarship Program, which covers tuition and fees at partner colleges in the award recipients’ state of residence.

The Takeaway

DACA recipients may have options to help them afford college. Although federal student loans aren’t an option, there are scholarship programs for undocumented students, as well as state-based and institutional aid they may qualify for, depending on the state they live in and the college they attend.

As a DACA recipient, you can also take out private student loans to help pay for school. And there’s the possibility to refinance your student loans in the future for better rates and terms if you choose to, as long as you meet the student loan refinancing eligibility criteria.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

What documents are required for DACA students to get loans?

DACA students are not eligible for federal student loans, but they may be able to take out private student loans (in some situations, these may be called DACA student loans). In order to qualify, they might need a cosigner who is a U.S. citizen or permanent resident.

DACA recipients can also fill out the Free Application for Federal Student Aid (FAFSA) to see what financial aid they may qualify for from their college or state. To complete the FAFSA, they will need a Social Security number.

Can DACA students qualify for federal work-study?

DACA students are not eligible for federal student aid, including federal work-study. However they may be able to get other jobs on campus that are not part of the work-study program.

Are there scholarships specifically for DACA recipients?

Yes, there are a number of scholarships specifically for DACA recipients. For instance, Golden Door Scholars provides scholarships for undocumented students studying for careers in STEM, nursing and business, and TheDream.US Scholarship Program covers tuition and fees at partner colleges in the award recipients’ state of residence.

Photo credit: iStock/Eduard Figueres

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOSLR-Q324-021

Sep

2024

Why Accredited MBAs Are Important

By Rebecca Safier | Going to College, Student Loans, student_loan | Comments Off

Earning your Master of Business Administration (MBA) requires a major investment of time, money, and energy, so it can be wise to choose an accredited program. Having accreditation means that a business school meets rigorous standards for a high-quality education.

Accrediting organizations examine a program’s curricula, faculty, career outcomes, and more, all of which can give you vital intel on the quality, value, and marketability of the degree. Earning accreditation isn’t a one-time event, either — schools must undergo the process on a regular basis to ensure they continue to meet accreditation standards.

Learn more about MBA accreditation so you can pick a program that will set you up for academic and career success.

Understanding MBA Accreditation

Demand for MBA degrees is high, and for good reason: Approximately 40% of the Fortune 1000’s C-suite holds the degree.

There are many MBA programs out there to choose among (one recent count found 579 across the U.S.; other figures go higher still). However, not all of them are accredited. Here’s what it means for an MBA program to have accreditation.

Definition and Purpose

Accreditation means that a program or school has met high standards for educational quality and student success. You might come across institutional accreditation, which means that the entire school is accredited, or programmatic accreditation, which applies solely to the MBA program itself.

More specifically:

• Official accreditation agencies require MBA programs to meet high standards (more on that below). During an accreditation review, an agency will consider the program’s curricula, faculty qualifications, learning and career outcomes, student achievement, and other factors.

• MBA accreditation suggests that a program will provide the training you need to succeed in the business world, as well as appeal to future employers. Plus, an MBA program must be accredited to qualify for federal financial aid, including federal student loans and grants.

This is not to say that you couldn’t get a good education and achieve a high-flying career in business from an unaccredited MBA program. Accreditation, however, adds a layer of confidence about where you might pursue this graduate degree, one that tens of thousands of American students pursue annually.

Accrediting Bodies and Standards

There are a number of accrediting bodies out there, but look for one that’s officially recognized by the U.S. Department of Education (DOE) or the Council for Higher Education Accreditation (CHEA). The DOE maintains a list of agencies here, or check out the CHEA directory.

You might come across both national and regional accrediting agencies, but there’s no distinction between the two since a change in DOE regulations in 2020. Now, MBA schools can apply for accreditation from any of these agencies, regardless of their location.

Accrediting bodies, which are comprised of educational professionals, establish operating standards for schools and programs. They also determine if a school meets those standards. After the review process, the agency will publicly announce its findings by issuing an accreditation.

Benefits of Attending an Accredited MBA Program

Attending an accredited MBA program isn’t necessary, but there are several benefits to doing so.

Quality Assurance and Rigor

Accreditation indicates that an MBA program has a strong curriculum with qualified faculty members. It shows that it consistently aligns with educational standards and will provide rigorous training to its students that prepares them for a career in business.

Employer Recognition and Reputation

Accredited programs also tend to have a better reputation in the eyes of future employers than non-accredited ones, making it easier to get hired following graduation. (That can also help you pay off your student debt, whether federal or private student loans, refinanced or otherwise, when you join the working world.) If you’re already working and hoping to use a tuition reimbursement benefit, your employer may require that you attend an accredited MBA program.

Transferable Credits and Mobility

If you decide to transfer schools, it may be easier to transfer credits from an accredited MBA program than a non-accredited one. Plus, earning your degree from an accredited business program may be necessary if you want to advance your education even further with a doctoral-level degree.

Recommended: Student Loan Refinancing Calculator

Top MBA Accrediting Organizations

There are several agencies that review and accredit MBA programs specifically. Here are three of the top organizations determining MBA accredited schools. It’s worth noting that some online MBA programs are also accredited.

Association to Advance Collegiate Schools of Business (AACSB)

Founded in 1916, the AACSB is the oldest accreditation organization for business and accounting programs. This nonprofit has a rigorous accreditation process, and schools must undergo review every five years to maintain their accreditation. The AACSB looks for teaching excellence, curriculum development, research quality, and student success, among other standards.

Accreditation Council for Business Schools and Programs (ACBSP)

The ACBSP is an international nonprofit organization that accredits business programs across the globe. Its process takes around three years, and it has accredited business programs at 1,200 member campuses since its formation in 1988. You can check out the ACBSP’s directory to see if your MBA program holds ACBSP accreditation.

International Accreditation Council for Business Education (IACBE)

The IACBE has been accrediting business and accounting programs since 1997. The process takes two to four years, and schools must meet high standards for teaching processes and educational outcomes. You can search the IACBE site to find accredited programs.

Recommended: Student Loan Refinancing Guide

Choosing an Accredited MBA Program

Choosing an accredited MBA program can help ensure you receive a high-quality education and make a good impression on potential future employers. Plus, you may not qualify for federal financial aid if you attend a non-accredited school, which means you’d miss out on federal student loans, grants, and work-study. (You can also access private MBA loans; it can be smart to shop around and see what MBA loan rates are from at least a few lenders.)

Research Accreditation Status

You can typically find a school’s accreditation status on its website, but reach out to the school directly if you can’t locate this information. As noted above, some popular MBA accrediting agencies, such as the ACBSP, also maintain a directory of schools for you to reference.

Evaluate Program Curriculum and Faculty

While accreditation is a good sign, make sure to do your own research on an MBA program’s curriculum and faculty. Check out what classes are available, who the faculty are, and any research projects or other opportunities that may help you achieve your goals. You might also speak to current students or recent alumni to learn about their experiences and make sure the MBA is worth it.

Align with Career Goals

For most, an MBA program is only worthwhile if it helps them achieve their career goals. Many students often need MBA loans to undertake their studies. Before making that commitment, consider what your career goals are and how the program can equip you with the skills and experiences to accomplish them. Along with speaking to faculty and administrators at the school, you could also connect with people in your target industry for education and career advice.

The Takeaway

MBA accreditation is a voluntary and comprehensive process that schools may undertake to demonstrate the quality of their offerings and maintain eligibility for federal financial aid. There are several organizations that accredit these programs, meaning that they have met high standards for curriculum, faculty, and student outcomes. Plus, they undergo review every few years to maintain accreditation and meet evolving educational guidelines.

If, during your educational journey, you are looking for ways to refinance student loans, see what SoFi offers.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Are online MBA programs accredited?

An online MBA program may or may not be accredited. Look for the program’s accreditation status on its website. You can also reach out to the school directly to gather this information.

Do employers prefer accredited or non-accredited MBAs?

Employers generally prefer accredited MBA programs. Accreditation indicates that a program provides rigorous instruction and training and prepares its students for post-graduation success.

How often are MBA programs reviewed for accreditation?

The frequency of accreditation review for MBA programs can vary by accrediting agency. For AACSB, one of the most prestigious accreditors for MBA programs, schools must undergo the review process every five years to maintain their accreditation.

Photo credit: iStock/kate_sept2004

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOSLR-Q324-010

Sep

2024

How Much Does Your Credit Score Increase After Paying Off a Debt

Does Paying Off a Debt Increase Your Credit Score?

By Kelly Boyer Sagert | Credit, relay | Comments Off

Whether you’re thinking about paying off a debt or mulling over how to increase your credit score — or both — it’s reasonable to ask if paying off debt helps your credit rating. The answer, though, is more complex than a simple yes or no.

Let’s unpack how paying off a debt can either raise or reduce your credit score, depending on the circumstance; how credit scores are calculated; and how managing your credit utilization can give you some control over your credit score.

How Paying Off a Debt Is Connected to Your Credit Score

What affects your credit score is on a lot of people’s mind. Your credit score is determined by five factors, some of which are weighted more than others. Paying off a debt can affect each of these factors in different ways, causing your score to rise or dip. Sometimes changes in two factors can even cancel each other out, leaving your score unchanged. This is why it’s hard to predict how paying off a debt will affect your credit.

A good first step is to find out your credit score. You may be able to get it for free through your bank, credit card issuer, or lender; through Experian; or by signing up for a free money tracker app.

Check your score with SoFi

Track your credit score for free. Sign up and get $10.*

Credit Score Calculation Factors

According to FICO®, a credit rating company, these are the five factors commonly used to calculate your FICO Score:

• Payment history (timely payments): 35%

• Amounts owed (credit utilization): 30%

• Length of credit history: 15%

• New credit requests: 10%

• Credit mix (installment versus revolving): 10%

Once FICO’s algorithm calculates your score, a credit score rating scale assigns it a category ranging from Poor to Exceptional. A higher number indicates to lenders that a person is a lower risk for default:

• Exceptional: 800 to 850

• Very Good: 740 to 799

• Good: 670 to 739

• Fair: 580 to 669

• Poor: 300 to 579

As you can see, a Fair credit score falls between 580 and 669. A Poor or bad credit score falls between 300 and 579. The minimum credit score required to qualify for a loan is around 610 to 640, depending on the lender — meaning not everyone with a Fair score would qualify.

Recommended: Do Personal Loans Build Credit?

Why a Credit Score Can Go Down After Paying Off a Debt

Paying off debt feels good and improves your financial situation. But it could also cause your credit score to drop. This negative impact can be due to changes in one or more factors, including:

• credit utilization

• credit mix

• overall credit age

When you pay off a credit card and then close the account, you reduce your available credit and increase your credit utilization. Similarly, if you pay off your only car loan and close that account, you have one fewer type of account in your credit mix. Finally, paying off and closing an older account may reduce the average age of your overall credit history. (We’ll explore these scenarios in more detail below.)

While none of these things is “bad” in financial terms, it could temporarily count against you in the world of credit scores.

What Is Credit Utilization?

Now for a little more background on credit utilization. Credit utilization is a factor with revolving forms of credit, such as credit cards and lines of credit, where you can reuse the account up to your limit.

Your credit utilization rate, or ratio, is determined by dividing the sum of your credit limits by the sum of your current balances. So if someone has a $5,000 limit and is using $2,500, that’s a 50% credit utilization rate. Your rate should be kept below 30% to avoid a negative affect on your credit score.

What Is a Credit Mix?

Lenders like to see that an applicant can successfully handle different kinds of credit. This includes installment loans like mortgages, car loans, and personal loans, as well as revolving credit such as credit cards and lines of credit. If a person can manage both types of credit well, a lender will likely consider them less of a risk.

Recommended: Should I Sell My House Now or Wait?

How Credit Age Factors In

The length of your credit history demonstrates your experience in using credit. To lenders, the longer the better. When payments to an older account are on time, this combo reassures lenders that you will likely continue to make timely payments going forward.

New credit accounts can also lower your credit age. More important, opening or even applying for many new accounts in a short period of time may be a red flag to lenders that you could be in financial trouble. The application process also involves a hard credit inquiry, which can lower your credit score.

Sample Scenarios

Here are two examples of someone paying off a credit card. In one case, the credit score goes up. In another, it goes down.

Credit Utilization Goes Down / Credit Score Goes Up

Let’s say that someone has a credit utilization rate of 40%, which is negatively impacting their credit score. (Remember, below 30% is best.) When they make enough payments to bring their utilization rate down to 25%, this can boost their credit score.

Credit Mix and Age Go Down / Credit Score Goes Down

Now, let’s imagine that someone pays off the balance of their first and only credit card. This should help their utilization score! But wait: Then they close the account, and their average credit age drops. And since this is their only form of revolving credit, their credit mix has lost out, too.

Counterintuitively, paying off the card may make their credit score go down — at least in the short term.

Paying Off a Loan Early vs Paying It on Schedule

People often wonder if it’s better to pay off a loan early, if you can. In the case of a personal loan, early payoff can lower the average age of someone’s credit history, possibly lowering their credit score.

But in reality, the impact will depend upon their overall credit situation. Paying the loan off according to the schedule will keep it open longer, which can help with their credit age. On the other hand, they’ll pay more in interest because the loan is still open.

If you’re in this situation, weigh the pros and cons before making the decision that’s best for you.

How Long Can It Take To See Your Credit Score Change?

According to the credit report agency TransUnion, credit reports are updated when lenders send them new information. In general, this happens every 30-45 days, though some lenders update more frequently.

If you’re concerned about your numbers, consider signing up for a credit score monitoring service. What qualifies as credit monitoring varies from company to company. Look for a one that sends alerts whenever your score changes for better or worse.

Recommended: What Is a Tri-Merge Credit Report?

The Takeaway

How paying off a debt affects someone’s credit score depends on the person’s overall credit profile. Paying off a credit card typically helps your credit score because the account remains open, lowering your credit utilization. Paying off a loan can hurt your score because the loan is then closed, potentially reducing your credit mix and age. Generally, though, borrowers shouldn’t let credit score concerns prevent them from taking actions that are in their financial interest.

SoFi helps you stay on top of your finances.

FAQ

How fast does your credit score increase after paying off a debt?

In fact, your credit score may dip for a short period after a debt is paid off. Lenders report new information to credit reporting agencies every 30-45 days, though some lenders update more frequently. Generally, you shouldn’t let concerns about your credit score prevent you from taking action that is in your best financial interest.

Is it best to pay off all debt before buying a house?

According to credit report agency Experian, it generally makes sense to pay off credit card debt before buying a home. Just know that in some circumstances, paying off a debt may temporarily reduce your credit score, which can affect the loan terms you qualify for. If you do pay off a credit card, consider keeping the account open until after you qualify for a loan.

How do you get an 800 credit score?

Pay bills on time, maintain a credit utilization rate under 30%, and effectively manage your credit history length, new credit requests, and credit mix. Although this won’t guarantee a score of 800, it can help you maximize yours.

Photo credit: iStock/Patcharapong Sriwichai

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL-Q324-036

Sep

2024

How to Remove a Closed Account from Your Credit Report

By Kim Franke-Folstad | relay | Comments Off

Just because you’ve closed an account, that doesn’t mean the information will automatically disappear from your credit report. That account can continue to impact your credit score for years — in good ways and not-so-good ways.

There are a few different things you can try if you want the account removed from your credit reports, but it may take some time. And since a closed account can sometimes have a beneficial effect on your credit score, you might decide it’s best to simply leave it alone.

Read on to learn more about how an account can continue to impact your credit even after it’s closed and how to get a closed account off your credit report.

What Happens When You Close an Account?

When you close an account, your credit reports will reflect the account’s new status. But information about the closed account — including how much you borrowed and your payment history — may still be used to calculate your credit score and inform lenders about your overall creditworthiness.

Even if you’ve paid every penny you owe, the account still may be included in your reports. And if you have an outstanding balance, you can expect payments and other activity to show up on your reports every month.

The Fair Credit Report Act — the federal law that regulates how consumer credit agencies handle and report information — allows the credit bureaus to include positive and negative information about closed accounts on a credit report for several years.

Recommended: Should I Sell My House Now or Wait?

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How Can Closed Accounts Affect Your Credit?

Closing an account can affect your credit in ways both good and bad. Here’s a look at what can happen in the months and years after you close an account.

An Unexpected Credit Score Dip

Something that surprises a lot of people is that closing an account can actually have a negative impact on credit scores — even if the account was in good standing. That’s because closing an account can affect certain factors that go into calculating your FICO Score. The dip may be temporary (as long as you stay on track with managing your debt), but here’s what’s behind it:

Credit Utilization Ratio

Your credit utilization ratio represents the amount of your available credit that you’re currently using. It’s part of the “amounts owed” category, which determines 30% of your FICO Score.

If you close an account and the amount of credit available to you is reduced, that can affect your ratio. And a higher credit utilization ratio can mean a lower credit score.

Length of Credit History

Closing a long-held credit card account can also affect the “length of credit history” category, which accounts for 15% of your FICO Score. FICO looks at the age of your oldest account, the age of your newest account, and the average age of all your accounts. So closing an older account after you pay it off can lower your score.

Credit Mix

FICO also looks at your “credit mix” when it’s calculating your overall score, so it can help if you have both revolving debt (with a credit card or line of credit) and some type of installment debt (such as a student loan, personal loan, car loan, or mortgage). Your credit mix is 10% of your FICO Score.

But There May Be Good News, Too

Should you still decide to close your account, there is some happy news: If you did a good job managing that particular credit card or loan, the information can stay on your credit reports for up to a decade, continuing to boost your credit score. However, the bump from a closed account may not be as significant as from an open one.

When Should You Remove a Closed Account from Your Credit Report?

Since information about a closed account in good standing can be a positive thing for both your credit reports and credit scores, you may decide it makes sense to bask in those benefits for as long as possible.

But if your closed account is littered with negative information that could make you look like a risk to lenders and potentially lower your credit scores, you may want to attempt having it removed from your credit reports. Any negative information — if you made late payments, defaulted, or the account went to collections — will stick around, and can lower your score for up to seven years.

There are a few different strategies you can try. If, for example, the closed account contains inaccurate or fraudulent information, or if the information is dated, you have a right to pursue having it removed. If you suspect that you’re a victim of identity theft, you may want to learn the differences between a credit lock vs. a credit freeze.

But if the negative information is accurate, you may have to appeal to that creditor to help you clean up your record. Or you can decide to wait it out, and the closed account will eventually come off your report.

Steps for Removing a Closed Account from Your Credit Report

There are four basic strategies for removing a closed account from your credit report.

Dispute Errors on Your Credit Report

If you believe your credit report includes inaccurate, incomplete, or fraudulent information on an open or closed account:

Contact the Credit Bureaus

First, review the data on file with all three credit reporting agencies: Experian, Equifax, and Transunion. (Or request a tri-merge credit report that combines the data from all three.)

Then contact the credit bureaus and explain why you’re disputing the information and include supporting documents. All three bureaus have a page just for this purpose on their website. Or you can download a dispute form, fill it out, and mail it in. Either way, following the recommended format will help ensure you include all necessary data.

Contact the Company That Furnished the Information

Contact the bank, credit card company, or business that provided the disputed information to the credit bureaus. The Consumer Financial Protection Bureau (CFPB) offers instructions and a sample letter to assist with this process. If you suspect the inaccurate information could be the result of identity theft, you can find help through the Federal Trade Commission at IdentityTheft.gov.

Wait for a Fix

The credit bureaus typically have 30 calendar days (45 in some situations) to look into your dispute. Once the investigation is complete, they have five business days to let you know, and you should receive a copy of your updated credit report.

If they don’t agree the information should be removed, you can send a letter and ask that they note the dispute on future reports. You also can send a complaint to the CFPB or contact an attorney.

Write a Goodwill Letter or Pay-for-Delete Letter

Although a creditor isn’t required to remove negative information from your credit reports, you can try writing a goodwill or pay-for-delete letter asking for their help.

Not much of a writer? You can try calling instead. Either way, be prepared to plead your case clearly and respectfully.

Goodwill Letter

A goodwill letter can give you an opportunity to explain to a creditor why you fell behind on your payments and why you’re hoping to get the negative information removed from future credit reports.

If you’ve been a long-standing customer (or can manage to write a heartstring-tugging letter), you may be able to convince the financial institution or business to help you turn over a new leaf.

Pay-for-Delete Letter

If the closed account still has a balance, you may be able to use a pay-for-delete letter as an incentive to get it removed from your credit reports. This strategy involves offering to pay the outstanding balance in exchange for getting the account off your reports.

Wait for the Account to Come Off on Its Own

It may feel like a lifetime, but negative information can be listed for only seven years. So you may decide just to wait it out.

If the information is still on your reports after the seven-year mark, you can use the dispute process to have it removed.

Establishing Healthy Credit Habits for the Future

Watching your credit score take a dip after you close an account can be frustrating. But practicing good financial habits going forward can go a long way toward bolstering your credit scores. Here are a few steps to consider:

Make Timely Payments

Payment history makes up 35% of your FICO Score, so if you want to boost your score, it’s critical to pay your bills on time.

Keep Your Credit Utilization Low

Because credit utilization is another important factor that goes into calculating your credit score, it’s a good idea to keep credit card balances low. Don’t let a high limit on a card or line of credit tempt you into spending more than you can manage.

Let Your Credit Accounts Age Gracefully

It may be tempting to cancel a credit card you’ve finally managed to pay off. But since your credit score is partially based on the age of your accounts, it may make more sense to keep open an account that’s in good standing.

Track Your Spending

If you like the convenience of using credit and debit cards to pay for purchases, but you tend to lose sight of your spending, a money tracker app like SoFi can help you see exactly where your money is going, so you aren’t just winging it month to month.

Monitor Your Credit

If you aren’t monitoring your credit, you may not have any idea what your credit score is. By using an app like SoFi, which has free credit monitoring, you can check your score regularly. You also can request a free copy of your credit report once a year from each of the three credit bureaus via AnnualCreditReport.com.

Be Vigilant Regarding Credit Report Errors and Fraud

In order to dispute problems on your credit report, you have to know what to look for. Learning how to read your credit report can help save you from more serious financial trouble.

Familiarizing yourself with the various sections might help you spot common credit report errors and potential fraud.

The Takeaway

Closed accounts aren’t automatically removed from credit reports. The credit bureaus may keep information from a closed account on your reports for years: seven years for negative information and ten years for positive info. However, you can request to have the account removed if you file a dispute and can show the information is inaccurate. Other strategies include writing a “goodwill” letter, a “pay-to-delete” letter, and contacting the creditor directly. It’ll take time, but persistence often pays off.

SoFi helps you stay on top of your finances.

FAQ

Can you remove a closed account from your credit report?

Unless information about a closed account is inaccurate, it may appear on your credit report for years. But there are strategies that can help you with getting the information removed or updated.

How long does it take for a closed account to be removed from a credit report?

It can take up to seven years for negative information from a closed account to come off a credit report. And it can take up to 10 years before positive information goes away.

Will paying off a closed account help a credit score?

Your credit reports will continue to include negative information about a closed account for up to seven years. But if you follow through and pay off the debt, the change in the account’s status can be noted on your reports. And if you’ve lowered the amount of debt you’re carrying by paying off the account, it can help improve your credit score.

Photo credit: iStock/fizkes

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL-Q324-034