Your credit score is more than just a number – it reflects your financial responsibility.
It can significantly impact your ability to achieve important goals, such as buying a house or car.
So, when you see your credit score drop, it’s natural to feel concerned and even frustrated.
But don’t worry – there are several reasons why your credit score may have dropped, and understanding those reasons can help you take steps to improve it.
With some knowledge and effort, you can turn things around and get your credit score back on track.
Let’s explore some possible reasons why your credit score dropped and what you can do about it. Here are 7 common reasons.
7 Reasons Your Credit Score Could Drop
The three major credit bureaus, Equifax, Experian, and TransUnion, consider many factors when determining your credit scores.
While the most significant factor is whether you make your payments on time, other actions are monitored, such as maxing out your credit cards or applying for lots of credit.
With that in mind, here are some of the most common things that can cause your scores to drop.
1. Late Or Missed Payments
Depending on the scoring model used, payment history accounts for the largest part of your credit score, ranging from 35-40%.
That means your score will drop if you miss a payment or pay late and it gets reported.
However, according to Experian, a missed payment can’t get reported until it’s at least 30 days late, so you have a little grace period.
If you are more than 30 days late on a payment, make it as soon as possible.
The later a payment is, the more it can hurt your score.
For example, if a payment is 60, 90, or 120 days late, it will be worse than if it was just 35 days late.
Unfortunately, once a late payment hits your credit report, it will stay on your record for seven years.
The best thing you can do is make all your upcoming payments on time.
Best Websites To Check And Build Your Credit Score
2. Increase In Credit Utilization Rate
A credit utilization rate, also known as a credit utilization ratio, is another crucial factor that can account for up to 30% of your credit score.
It looks at how much of your available credit you have used on revolving credit lines like credit cards.
For example, if you have a credit card account with a $2,000 credit limit and keep a $1,500 balance, your credit utilization rate would be 75%.
The less credit you’ve used, the better, as high balances indicate financial distress. So if you’ve recently used your credit cards and your balances have increased, your credit score will drop.
You may also see your score drop if you have a balance on a card and the credit limit was recently decreased.
The good news is it can be an easy fix. By paying down your balances, your score will usually rebound pretty quickly.
The common rule of thumb is to keep your credit utilization rate below 30%, but the lower, the better.
Remember that credit card companies typically report to the credit bureaus each month.
It can be helpful to monitor your credit report and note when your balances get reported so you can plan to pay down your balances before the monthly reporting dates.
3. Recent Credit Applications
Credit bureaus monitor when you apply for credit and let a lender check your credit report, and it accounts for up to 10% of your credit score.
Note there are two types of credit checks commonly used — a hard inquiry and a soft inquiry.
Soft inquiries are often used when you’re just getting a quote to compare offers, while hard inquiries are used to finalize a loan or other credit offer.
Hard inquiries hurt your credit score, while soft inquiries don’t.
So if you were recently shopping for a personal loan, a mortgage, or another type of credit line and agreed to a hard credit check, you will likely see your score drop a few points.
That doesn’t mean you shouldn’t apply for credit, but you should do so with discretion.
Only let a lender perform a hard inquiry if you seriously consider its offering. Too many hard inquiries signal that you may be having financial troubles.
If your score has dropped because of a hard credit inquiry, it will likely begin to rebound after some time has passed and will increase when the inquiry drops off after two years.
4. Closed A Credit Card Or Account
If you recently closed a credit account, that can cause a drop in your credit for one of two reasons.
First, your credit mix accounts for up to 10% of your credit score.
Credit bureaus want to see a mix of different types of credit, including installment loans like a mortgage and revolving credit accounts like credit cards.
If you had one installment loan and three credit cards and paid off the installment loan, you’d only be left with revolving accounts, which would be bad for your credit mix.
You could fix this problem by opening up a new installment loan.
However, a new loan can temporarily cause your score to drop until you pay the balance down.
Second, the length of your credit history also accounts for up to 15% of your credit score.
Credit bureaus look at your oldest account, newest account, and average account age.
If you close an account that happens to be your oldest, it could cause your score to drop by shortening your oldest account and average account age stats.
In this case, you need to keep as many accounts open for as long as possible in the future.
5. Victim Of Identity Theft
Another possible cause of a credit score drop is that you’ve been the victim of identity theft.
If someone has stolen your information and used it to open accounts, apply for credit, or drive up your credit utilization ratio, it can harm your credit score.
In this case, notify the affected creditors and banks, put a fraud alert on your credit reports, and freeze your credit.
From there, you can report the incident to the FTC and the police, remove the fraudulent information from your credit reports, and update passwords, cards, and other things as necessary.
A service like LifeLock can also help to protect your identity going forward.
Once the information is removed from your credit report, your credit score should rebound.
6. Mistakes On Your Credit Report
The information in your credit report could also contain mistakes.
It’s a good idea to check on your reports regularly with all credit reporting agencies to ensure everything is accurate and up to date.
Something could have been misreported if your score seemed to drop for no reason. If you do find a mistake, you can file a dispute.
From there, the credit bureau will communicate with your creditor to work to clear up the misunderstanding.
If the item is found to be a mistake, it will be removed, and your credit score will go back up.
7. Foreclosure Or Bankruptcy
Lastly, if your home goes into foreclosure or you file for bankruptcy, both will significantly impact your credit score.
These are both major defaults that future creditors will see as red flags.
However, as time passes, they will impact your credit less and less until they fall off your report.
A foreclosure stays on your credit report for seven years, while bankruptcies remain for seven to 10 years, depending on the chapter you file.
Check your credit reports to figure out what may have caused your credit score to drop.
Look for one of the above reasons to see if they may be the cause.
You may also want to sign up for a credit monitoring service like Credit Karma or Credit Sesame to stay in the know.
7 Ways To Improve Your Credit Scores
Here are 7 ways to improve your credit score:-
(i) Timely bill payments
Making on-time payments for all of your bills is crucial because late payments can severely negatively impact your credit scores.
(ii) Lowering credit card balances
High credit card balances can be detrimental to your credit scores, and therefore, it is essential to pay off as much of your balance as possible.
(iii) Checking credit reports for inaccuracies
Errors on your credit report can reduce your credit scores significantly.
Regularly monitoring your credit reports and disputing any errors you find is vital.
(iv) Avoid applying for multiple new credit accounts at once
Applying for multiple credit accounts simultaneously can lower your credit scores, so it is advisable to limit your applications to only when necessary.
(v) Keeping old credit accounts open
Closing old ones can harm your credit scores, so keeping your oldest ones open for as long as possible is recommended.
(vi) Diversifying credit types
Having a diverse range of credit types, such as credit cards, loans, and mortgages, can help to enhance your credit scores.
(vii) Considering a secured credit card
If you have poor credit, a secure credit card can be a useful tool to rebuild your credit scores by making timely payments.
Build credit with every bill you pay.
Conclusion
In conclusion, experiencing a drop in your credit score can be frustrating and stressful.
However, It’s crucial to immediately identify the cause of the drop and take steps to improve your credit score.
Remember that improving your credit score takes time and effort, but by staying persistent and using responsible credit practices, you can successfully rebuild your credit score and achieve financial stability.
FAQs
Credit scoring models consider a wide range of factors to determine your score.
If your score changed, some underlying trigger caused it, such as the seven above.
If you’d like help, the major credit bureaus and other third-party companies offer to monitor services that alert you when any changes to your credit report occur.
You can receive notifications about updates to your report, score fluctuations, and much more to help you understand why your credit score might have changed.
Credit utilization is a big factor in the credit scoring models, so if your credit card balances have increased, you’ll likely see a big drop in your score.
It’s not uncommon to see a 30-point change if you significantly increase your credit utilization.
First and foremost, make sure you make all your payments on time.
If you are late, don’t wait more than 30 days to catch up.
Beyond that, ensure that all of the information on your credit reports is correct, keep your credit utilization ratio down, keep your accounts open as long as possible, and have a mix of both loans and credit cards.
If you do want to look for new credit, be mindful of hard inquiries.
Usually, you can get a quote with a soft inquiry.
Further, if you perform a group of hard inquiries for a car or home loan within a set period of time (often 14-45 days), they are generally counted as one.
According to MyFico, the amount your credit score drops depends on a number of factors, such as your starting score, past late payments, and more.
However, when looking at two typical credit profiles, a payment missed by 30 days could cause a drop of anywhere from 17 to 83 points.
Generally, you will see a more significant drop if your score is higher at the start, with fewer derogatory marks.
Maxed-out credit cards have an even bigger impact, causing scores to drop from 27 to 128 points.
The two most commonly used credit scoring models are FICO and VantageScore. The latest FICO score is known as FICO 9, and the latest Vantage Score is VantageScore 3.0.
