Why Did My Credit Score Drop?
Key takeaways
- Your payment history and credit utilization are the most important credit score factors, and are often the culprit when your score drops unexpectedly.
- Other factors that can cause your score to drop include changes to your credit mix or length of credit history, or the addition of new accounts.
- Credit report errors, identity theft and fraud can also cause your credit score to drop, but may be fixable if you report the issue quickly.
- A few ways to improve your credit score include paying your bills on time, maintaining a low credit utilization and regularly monitoring your credit report.
Credit scores often seem like a mystery, going up or down from one month to the next for no apparent reason. However, there’s a specific formula that’s used to calculate your score. And if you notice that your credit score dropped, it’s likely due to a specific reason, such as a missed payment, high credit balance or even identity theft. Keep reading to learn a few reasons your credit score may have dropped and what you can do to fix it.
10 reasons your credit score might drop
It’s never a good feeling to see your credit score drop — and even less so if you aren’t sure why it’s happened. If you’ve noticed that your credit score has dropped, check your credit report to see if one of these 10 common situations has happened.
1. Missed or late payments
Your payment history is the most critical factor impacting your credit score, making up 35% of your FICO Score and about 40% of your VantageScore (depending on the model). Because of how heavily it’s weighted when calculating your credit score, even one missed or late payment can have a major impact on your credit — and a late payment could cause your credit score to drop by roughly 100 points or more.
If you continue to miss payments on a specific debt, the original creditor might sell the debt to a debt collection agency. You generally have between 120 and 180 days before this happens, but unfortunately, you might not receive advance notice.
Your credit report lists any debts sent to collections, which can cause your credit score to drop even more. In addition, other lenders may hesitate to approve future credit applications.
If you want to be more proactive, consider setting up automatic payments to ensure you never have a late or missed payment again.
2. High balances
Another reason your credit score may have dropped is if you have a high balance on your revolving credit. Your credit utilization ratio — which refers to the amount of available credit you’re currently using — makes up 30% of your FICO Score and 20% of your VantageScore.
You can find your credit utilization by dividing your current credit card debt by your total available credit. For example, if you have a $300 balance on a credit card with a $1,000 limit, your utilization is 30%. You can run the numbers for each revolving debt account individually, as well as for all of your accounts combined.
Personal finance experts generally recommend a utilization ratio below 30% to maintain a good credit score. If yours gets too high, your credit score could drop. After all, when you max out a credit card, or get close to maxing it out, lenders see this as a risk that you won’t be able to pay back your debts.
3. Identity theft
Identity theft is, unfortunately, not uncommon in the U.S. According to the Department of Justice, about 22% of Americans have experienced identity theft in their lifetimes. And if your credit score has dropped for no reason, it could signify that you were a victim of identity theft.
Someone may use your Social Security number to steal your identity and open new accounts that then show up on your credit report. Identity theft can affect every aspect of your credit score, including your payment history, credit utilization, credit length, credit mix and new credit.
To determine if identity theft was the reason for the drop of your credit score, scour your credit reports for warning signs like unfamiliar addresses or accounts. To help catch identity theft right away, use a credit monitoring service like LendingTree Spring or make a point to regularly check your credit reports using AnnualCreditReport.com.
4. Credit card fraud
Credit fraud is when someone uses one of your credit cards without your knowledge. This can happen if your wallet is stolen or someone copies your credit card number.
Unfortunately, the fraudster could max out your card before you even realize the card is missing. In some cases (especially if you don’t react quickly) this could leave you with a hefty bill to pay. It could affect your credit by increasing your card utilization and possibly leading to missed payments.
The good news is you’re not legally responsible for unauthorized credit card charges that exceed $50 as long as you report them to your card issuer in a timely manner. If you act quickly, you may be able to resolve the issue before it even reaches your credit report.
5. Mistake on credit report
Your credit score is based on data in your credit report. But sometimes mistakes happen, like a payment being reported for the wrong account or a late bill showing up even though you’d paid it in full. In fact, nearly half of participants in a recent Consumer Reports study found at least one error on their credit report.
Some mistakes are relatively harmless — an incorrect address, for example. Others, however, could harm your credit score. For example, a creditor could incorrectly report a missed payment or a higher balance than you actually have, both of which could cause your credit score to drop.
By law, you’re entitled to a free annual credit report from each credit bureau — but AnnualCreditReport.com now makes free credit reports available once every week. Check it regularly or use one of the best credit monitoring services to ensure nothing is amiss.
To be safe, review your reports from all three credit bureaus — Experian, Equifax and TransUnion. You’ll only need to file one dispute, since the bureaus are required to notify the others. Once a dispute is filed, you should receive a response within 30 days.
6. Cosigning a loan or credit card
Cosigning a loan or credit card can help a friend or family member receive financial assistance if they don’t meet the qualifications on their own. However, being a cosigner is a big responsibility and can impact your credit score.
When you cosign a loan, you take equal legal responsibility for the loan. So if the original borrower can’t make the payments, the lender will expect you to. And if there are any late payments or defaults on the account or the original borrower maxes out the card, you’re likely to see your credit score suffer.
Because of how impactful a cosigned loan can be on your credit score, it’s important to agree to cosign loans and credit cards only for people you fully trust to repay the debt responsibly.
7. Too many credit card applications
When you apply for a loan or credit product — think mortgages, auto loans, personal loans or credit cards — the lender typically reviews your credit history. This results in what’s called a “hard inquiry” on one or more of your credit reports.
A hard inquiry can ding your score from 5 to 10 points and stay on your report for two years (unlike an informal or “soft” check, which doesn’t affect your credit). So even if you receive approval, just applying for credit can affect your score.
You should also note that 10% of your credit score is determined by “new credit.” From a lender’s viewpoint, opening several new credit accounts within a short time might signal financial hardship.
When shopping for a car loan or mortgage, those inquiries are often lumped together as one hard inquiry if made within a 30- to 45-day period — referred to as rate shopping. The lesson here is to apply for new credit judiciously, and if you need to make several applications, try to do them at around the same time.
8. Closing old accounts
You may be surprised to learn that closing an old credit account — or your creditor closing it on your behalf — can cause your credit score to drop. This is because your length of credit history makes up 15% of your FICO Score, and a longer credit history is seen as a positive thing.
You can avoid any impact to your credit by keeping your old cards open, but it’s possible that a creditor could close it on your behalf. This is more likely to happen during tough economic periods when lenders want to reduce their exposure to possible defaults or when the card is inactive for an extended period.
If your lender lowers your limit or closes your card — and you still have a balance — your utilization will suffer. For example, if you have a $300 balance with a $1,000 credit limit and your credit limit drops to $500, your credit utilization will change from 30% to 60%.
Similarly, closing a credit card will remove that credit line from your overall available credit, hurting your credit score if you have high balances on other credit cards.
9. Paying off a loan
A common question is, “Why did my credit score drop after paying off debt?” It seems counterintuitive, but even though paying off a loan is a positive thing, it can hurt your credit score.
First, paying off a loan and having that account marked as closed on your credit report may reduce your credit mix, which makes up 10% of your FICO credit score. Your credit mix considers whether you have both revolving credit (such as credit cards) and installment credit (such as mortgages, auto loans and student loans).
In addition, just like with a closed credit card account, closing a loan account reduces the average length of your credit history, which can have a small impact on your score.
10. Bankruptcy or foreclosure
A bankruptcy or foreclosure can severely damage your credit score — potentially causing you to lose 130 to 240 (or more) points.
A Chapter 7 bankruptcy will stay on your credit reports for 10 years, and a Chapter 13 bankruptcy will stay for seven years. A foreclosure will remain on your reports for seven years from the date of your first missed mortgage payment that led to the lender foreclosing on your property.
The impact to your credit will likely lessen over time, possibly allowing you to qualify for new credit. However, it can still have some impact as long as it remains on your credit report.
Another tool for rebuilding your credit is a credit builder loan. With a credit builder loan, you don’t get any funds upfront. Instead, you pay money to a financial institution that puts it into a savings account or certificate of deposit (CD). At the end of your loan period, the lender will allow you to access your saved funds. As long as the lender reports this to the credit bureaus, you’ll be on your way to building a positive payment history.
Ways to improve your credit score
If you want to improve your credit score or keep it going strong, the best strategy is simply to use your existing credit as responsibly as possible. Here are a few specific strategies that may help you increase your score or prevent it from dropping:
- Pay your bills on time: Your payment history has the greatest impact on your credit score, and the best way to improve your score — or prevent it from dropping — is to make all of your payments on time. If you’re concerned about forgetting a payment, set up autopay on your accounts so your bills are paid without you having to think about it.
- Maintain a good credit utilization: At 30% of the FICO Score calculation, your credit utilization is important. Aim to keep yours below 30% — you can do this by keeping your revolving credit balances low, paying down existing revolving credit and asking your creditors to increase your credit limits.
- Be strategic about your active accounts: Maintaining a healthy credit mix — this means a mix of both revolving credit and installment loans — and a long average length of credit can improve your credit score. You can avoid small drops in your score by keeping your old credit accounts open while applying for new credit sparingly.
- Monitor your credit: Get frequent online credit reports from AnnualCreditReport.com. You can stay up-to-date on changes to your credit score and can quickly be made aware of errors or fraud. You may also consider signing up for a credit monitoring service, such as LendingTree Spring or one of the other popular options on the market.
It’s normal for credit scores to fluctuate over time. If you notice that your credit score has dipped a few points, it may be due to something simple, such as a big purchase you recently put on your credit card — which would increase your utilization rate.
However, if you notice that your credit score has dropped substantially — such as a fall of 50 to 100 points — that’s cause for concern. After seeing such a dramatic drop, check that you haven’t missed a payment or suffered fraudulent use of your information or one of your accounts.
If you’ve tried to increase your credit score on your own and haven’t had success, consider working with a nonprofit credit counseling agency, such as those associated with the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).