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Why Did My Credit Score Drop?

Many factors can cause your credit score to drop, such as a late payment, an increase in credit card applications or even a mistake on your credit report. While losing a few points is no big deal, a big decrease could hurt your future options for getting financing.

Understanding the basics of your credit score can help you keep it in tip-top shape. Below are 10 common reasons your credit score might fall, along with tips for repairing your credit.

10 reasons your credit score might drop

So, you may ask: “Why is my credit score dropping?” As noted above, many factors affect your credit score — some are within your control, and others are not. Here’s a quick overview of what could decrease your credit score.

1. Missed or late payments

Paying on time is the most critical factor impacting your credit score. It’s a top component of the two major credit score systems: FICO Score (where it’s 35% of the total score) and VantageScore (40% of total). Needless to say, late payments can tank your credit.

If you miss your credit card payment by a day or two but then quickly send in the money, you might get hit with a late fee, but your credit score probably won’t suffer. Issuers often allow a 30-day grace period before reporting late payments to the credit bureaus (and some even allow up to 60 days).

But if the late payments do get reported, your credit score could drop by roughly 90 to 110 points.

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 around 180 days before this happens, but unfortunately, you might not receive advance notice.

Debt collection companies can often use aggressive tactics to get debtors to pay up. And since your credit report lists any debts sent to collections, other lenders may hesitate to approve future credit applications.

  How to fix it: If this is the first time you’ve missed a payment, it’s worth calling your credit card issuer and asking for the late payment not to be reported to the credit bureaus. You’ll want to act quickly because once the payment is marked as late, it could stay on your report for seven years. Also, if you’ve paid late before, such a request is less likely to be successful. Likewise, consider setting up autopay (if you generally have enough to cover the payments) so you never miss a bill.

2. High balances

Another contributor to your credit score is your credit utilization ratio — which makes up 30% of your FICO Score and 20% of your Vantage Score. To calculate your credit utilization, divide 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%.

Do this for all your credit accounts to calculate your total credit utilization. Note that installment loans (car loans, mortgages, etc.) are not factored into your credit utilization ratio, just revolving accounts such as credit cards and lines of credit.

Although personal finance experts recommend a utilization ratio below 30%, your ultimate goal should be in the 1% to 10% range.

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. That’s why reducing your credit utilization ratio is the second most important factor in building good credit.

  How to fix it: Reducing your balances is one of the quickest ways to increase your credit score. If you have multiple cards with large balances, focus your debt payoff strategy on the ones with the highest utilization ratios.

3. Identity theft

If your credit score dropped for no reason, it could signify that you were a victim of identity theft. You can scour your credit reports for warning signs, such as unfamiliar addresses or accounts.

Make a point to check your credit reports using AnnualCreditReport.com. LendingTree also offers a free identity theft monitoring service.

  How to fix it: You can report the incident to the Federal Trade Commission (FTC). You’ll receive an Identity Theft Report, which you can use to dispute the fraudulent charges. Make sure to follow up on your report a month later to ensure things are fixed. You can also freeze your credit or add a fraud alert to protect yourself from any future incidents of identity theft.

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.

  How to fix it: Contact your credit card company immediately. Many companies offer zero liability protection, meaning you won’t have to pay for fraudulent charges. Consider setting up account alerts to receive notifications of every card purchase, which can help you stay ahead of any fraudulent activity.

5. Mistake on credit report

Your credit score is based on data in your credit report. Sometimes mistakes happen, such as a payment being reported for the wrong account or a late bill showing up even though you paid it in full.

By law, you’re entitled to a free credit report from each credit bureau. Regularly check it to ensure nothing is amiss.

  How to fix it: If a lender reports the error, try to resolve the situation with them first. If you are unsuccessful, you can file a dispute to get any incorrect information on your credit reports investigated.
To be safe, review your reports from all three credit bureaus — Equifax, Experian 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 since you’ll assume equal responsibility for the loan.

For example, if the original borrower has a late payment, maxes out the card, or defaults on the loan, both of your credit scores will suffer.

  How to fix it: Get online access to the account you cosigned and ensure you can receive monthly statements. Remember, as a cosigner, you’re responsible for the loan or credit card’s total debt. If the account’s balance gets unmanageable, it might be worth paying and closing the account to save your credit. However, it’s a good idea to discuss options with the borrower first to see if you can create a payment plan together.

7. Too many credit card applications

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. 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.

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.

  How to fix it: The good news is that each hard inquiry only knocks a few points off your credit score, and its impact will lessen after a year, and then fall off entirely after two years. 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

Shockingly, your credit card issuer can reduce your credit limit or even close your card at any time. 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.

  How to fix it: The first thing to do when a card is involuntarily closed or its credit limit is slashed is to call the phone number on the back of your card to get an explanation. If the issuer doesn’t restore the card or the credit limit, then the best action may be to open another credit account. Keep your balance under control and keep cards active by making small purchases.

9. Paying off a loan

A common question is, “why did my credit score drop after paying off debt?” It seems bizarre, but even though paying off a loan is a positive thing, it can hurt your credit score.

This is because it 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).

  How to fix it: Your credit score will likely recover quickly from such a dip if you show responsible behavior on your remaining credit accounts. Even though your credit score may decrease when you repay a loan, this shouldn’t prevent you from paying off your debts as quickly as possible.

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.

Furthermore, 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.

How to fix it: While it’s very likely a foreclosure or bankruptcy will impact your credit, you may be able to rebuild some 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 if you default on the charges. However, 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 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.

What is a good credit score?

The credit-scoring model most 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 to exceptional credit:

  • 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%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Credit mix: 10%

9 ways to improve your credit score

If you want to improve your credit score or keep it going strong, here are nine steps to take:

  1. Pay your bills on time.
  2. Keep revolving credit balances low.
  3. Set up autopay and alerts to ensure you pay your bills on time.
  4. Pay down debts to reduce your debt-to-income ratio (DTI).
  5. Check your credit reports regularly.
  6. Show lenders you can manage both revolving lines of credit and installment loans responsibly by maintaining a good credit mix.
  7. Apply sparingly for new credit.
  8. Consider enrolling in Experian Boost, which allows consumers to build credit through recurring payments, such as utility bills, a cellphone plan or a Netflix subscription.
  9. Work with a nonprofit debt counseling agency, such as those associated with the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).

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.

 

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