Should I be worried about a 20-point credit score drop?

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Watching your credit score drop can be discouraging. But should you sweat a 20-point decrease?

Key points

  • The higher your credit score, the easier it is to get an affordable loan.
  • While a 20-point drop in your credit score isn’t ideal, in some cases, it may not hurt you at all.

Your credit score isn’t just a random number. Rather, it is a calculation that tells lenders how risky or trustworthy you are as a borrower.

A higher credit score could lead to more affordable loan opportunities, such as a lower interest rate on a mortgage or personal loan. What about those great credit card deals you see advertised? Often the most attractive ones are reserved for borrowers with good credit.

It is for this reason that you should try to avoid situations where your credit score is affected. But what if your score drops by 20 points?

There are several factors that could lead to a 20-point drop. Paying off a loan, for example, might result in that kind of decline (although one would think that paying off a loan might have the opposite effect). The same goes for applying for too many new credit cards in a short period of time.

Clearly, any drop in credit score is less than ideal. But should you sweat a 20-point decrease?

look at the full picture

If your credit score is really in good shape, then a 20-point drop may not affect you as much, if at all. It’s when your credit score is on the verge of not being so great that a 20-point drop matters most.

Imagine you have a credit score of 825, which is considered excellent. With a score like that, you’ll generally be eligible for the most attractive interest rate a given lender is offering on a loan. You’ll usually be able to capitalize on credit card offers as well.

If your score drops from 825 to 805, it can be somewhat disappointing to watch. But ultimately, it shouldn’t have an impact on your ability to borrow. You’re likely to get the same deals with an 805 score as you would with an 825.

But if your score isn’t that great to begin with, a 20-point drop could have negative consequences. For example, a minimum credit score of 620 is needed to qualify for a conventional mortgage. If your score is at 635 and you take a 20-point drop, that could put you below that threshold.

Also, you may find yourself in a situation where a credit card company requires a minimum credit score of, say, 700 to qualify for a specific offer. If your score drops to 680, you could lose that opportunity, although 680 is still considered a good credit score.

How to avoid a drop in your credit score

Sometimes credit score drops are unavoidable. If you pay off your car loan or mortgage, for example, your score may drop. A long-term loan can contribute to a stronger credit history, which is a factor in calculating your score.

Also, paying off a loan could result in a less favorable credit mix. If your only open accounts are a mortgage and five credit cards, and you pay off your home loan, your credit mix will be even less balanced.

To be clear, you shouldn’t no pay back a loan on time because you’re worried your credit score will suffer. And if you can save money on interest by paying off a loan early, that’s also a move worth making, even if there’s a small hit to your credit score.

You can try to avoid a minor drop in your credit score by being careful about how you borrow. If you recently applied for a credit card, for example, waiting three to six months to open another could save you a small but noticeable downturn.

All told, a 20-point drop in your credit score is generally not something to lose sleep over. But it still wouldn’t hurt to understand the factors that could lead to that kind of success and avoid some of them if possible.

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