Why Did My Credit Score Drop?
While it’s normal for credit scores to fluctuate over time, a big drop in your credit score when you think nothing has changed about your finances can be cause for concern. But credit scores don’t change randomly, so if your score dips, there’s a reason for it.
We’ll walk you through common scenarios that can lower your credit score and ways to recover after a credit score drop.
7 reasons your credit score might drop
1. You paid late or missed a payment
Paying on time is the single most important factor impacting your credit score. It constitutes 35% of your FICO Score and 41% of your VantageScore. Late payments can tank your credit score.
If you miss your credit card payment date by a day or two and then make the payment promptly, you might get hit with a late fee, but your credit score probably won’t suffer. Issuers often allow 30 days before reporting a late payment to the credit bureaus (some may allow as much as 60 days). But once it does get reported late, your credit score could drop roughly 90 to 110 points.
Finally, there may come a point where your original creditor gives up on collecting the debt and sells it off to a debt collection agency. These companies frequently use aggressive tactics to reach debtors and convince them to pay up, and your credit reports will show that you’ve had a debt sent to collections — which will make other lenders unlikely to extend you credit.
2. You max out a credit card
The technical term for how much of your credit you’re using compared with how much you have available on your credit line is called utilization. To calculate your credit utilization, say you have a credit card with a $1,000 credit limit and you’re carrying a balance of $300, that means your utilization is at 30%. Personal finance experts recommend keeping your utilization well below 30%, and the closer it is to zero, the better for your credit score.
Tip: Loans are not factored into your credit utilization ratio, only revolving credit accounts, such as credit cards.
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 what you’ve charged to the card. For that reason, utilization has a significant impact on your credit score, accounting for 30% of your FICO Score. In other words, it’s the second most important factor to building good credit behind making on-time payments.
3. Your issuer reduces your credit limit or closes a credit card
Though it may come as a shock if it happens to you, your credit card issuer is allowed to reduce your credit limit or even close your card at any time. This is more likely to happen during tough economic times when lenders want to reduce their exposure to possible defaults or when the card is inactive for an extended period.
If your credit limit is lowered or your card is closed, and you’re carrying a balance, your utilization will suffer. For example, if you’re carrying a $300 balance on a card with a $1,000 credit limit and your credit limit is slashed to $500, your credit utilization jumps from 30% to 60%. Similarly, a closed card account will remove that credit line from your overall credit utilization, which will hurt your credit score if you’re carrying high balances on other credit cards.
4. You applied for a loan or new credit card
When you apply for a loan or credit product, such as a mortgage, auto loan, personal loan or credit card, the lender typically reviews your credit history, which results in a hard inquiry on one or more of your credit reports.
A hard inquiry can ding your score from 5 to 10 points, and stays on your report for two years. So even if you’re approved, just the act of applying for credit can hurt your credit score.
It’s also worth noting that new credit makes up 10% of your credit score. From a lender’s viewpoint, rapidly opening several new credit accounts can signal that you are having financial challenges.
5. Your credit report has wrong information
If your identity has been compromised and someone fraudulently applies for new credit using your personal details, this could result in a drop in your score for both the hard inquiry and perhaps defaulted payments.
Also, incorrect account information, such as an error in bill payment history, could harm your score. Make a point to check your credit reports using annualcreditreport.com. By law, you’re entitled to one free credit report from each credit bureau per year, and through April 2021, the bureaus are offering free weekly reports.
6. You’ve had a bankruptcy or foreclosure
A Chapter 7 bankruptcy will stay on your credit reports for 10 years, while a Chapter 13 bankruptcy will stay for seven. A foreclosure will stay on your reports for seven years from the date of your first missed mortgage payment that led to the lender foreclosing on your property.
How to fix it: After a bankruptcy or foreclosure, you may be able to rebuild credit with a secured credit card. To get one, you must submit a security deposit in the amount of your desired credit limit, protecting the issuer in case you default on what you charge to the card. However, be aware that as with any credit card application, approval for a secured card isn’t guaranteed.
Another tool for rebuilding your credit is a credit builder loan. With a credit builder loan, you don’t get money up front. Instead, you pay money to a financial institution that will put it into a savings account or certificate of deposit (CD) for you. At the end of your loan period, the money from the savings account or CD will be disbursed to you. As long as the lender reports to the credit bureaus, you’ll build positive payment history by paying on a credit builder loan.
You may be able to get a credit builder loan from a smaller bank, a credit union or an online lender such as Self.
7. You recently paid off an existing loan
While paying off a loan is a positive thing, it can still hurt your credit score because it can reduce your credit mix, which makes up 10% of your credit score. What your credit mix considers is whether you have both revolving credit, such as credit cards and installment credit, such as mortgages, auto loans and student loans.
What is a good credit score?
The credit-scoring model lenders generally use is the FICO Score, which ranges from 300 to 850. Your FICO Score will fall into one of five tiers, ranging from poor credit to exceptional:
- Exceptional: 800 or higher
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: less than 580
Here are the factors that impact your FICO Score (and their respective percentages):
- Payment history (35% of your credit score)
- Amounts owed (30% of your credit score)
- Length of credit history (15% of your credit score)
- New credit (10% of your credit score)
- Credit mix (10% of your credit score)
9 ways to improve your credit score
If you’re looking to improve your credit score or just want to keep it going strong, there are steps you can take to maintain a healthy credit score. Follow the steps below to build good credit:
As mentioned earlier, it’s normal for credit scores to fluctuate over time. If you notice that your credit score has dipped a few points, it may 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 a substantial amount, such as 50 to 100 points, that’s cause for concern. After noticing such a dramatic drop, check that you haven’t missed a payment or suffered fraudulent use of your information or one of your accounts.