Why did my credit score drop? 12 common causes

 

If you’ve ever checked your credit score and it was lower than you expected, you were probably left confused and concerned. The fact is, your score could drop for many reasons. Things like missing a bill and charging too much on your card can shave points off of your score.

While any change in your credit score can be worrisome, know that small fluctuations in your score are normal. Scores are typically updated every 30 to 45 days, meaning that your score can change month to month.

Below, we walk through the most common reasons why your credit score may have taken a dip, even when it seems like it came out of nowhere.

Table of contents:

1. Your credit utilization changed

2. You missed a payment

3. Your credit limit decreased

4. You closed a credit card account

5. You paid off a loan

6. You recently applied for a credit card or loan

7. You opened a new line of credit

8. You recently experienced a bankruptcy or foreclosure

9. Your account was sent to collections

10. Your co-signer on a loan or credit card fell behind on payments or has a high balance

11. Your identity was stolen

12. You have an error in your credit report

1. Your credit utilization changed

Increasing your credit card balances directly impacts your credit utilization, which is the amount of credit you’re using compared to the total credit you have available.

You should keep an eye on your total utilization because it impacts 30 percent of your credit score. Experts commonly recommend keeping your utilization under 30 percent, but you should aim to keep your ratio as low as possible since high utilization sends red flags to lenders.

Also keep in mind that lenders report to the three major credit bureaus (Equifax®, TransUnion® and Experian®) at different times of the month. This means that the credit bureaus might see that your balance is high even if you paid it down within the month.

How can I fix this?

The best way to repair a credit score dip caused by high credit utilization is to pay down your balance as quickly as possible. You can pay more frequently throughout the month instead of all at once to help consistently keep your balances down.

You can also ask your credit card issuer for a higher credit limit if you have a good relationship with them. This isn’t a guarantee, though, so it’s best to keep your ratio low to begin with.

2. You missed a payment

Late payments hit your credit score the hardest, accounting for 35 percent of your total score. A late or missed payment can drop your score by as much as 90 points, and will stay on your credit report for seven years.

It only takes a single missed payment to bring down your score. The negative impact of that late payment can snowball the longer you don’t pay it. Your credit card company may also tack on late payment fees or even a higher annual percentage rate (APR).

How can I fix this?

Lenders often wait to report a late or missed payment until 30 days after the due date. So if you can make up a missed payment before that 30-day mark, you may be able to avoid a drop in your credit score.

If a missed payment is already reflected in your credit report, the best thing you can do is to make the missed payment in full as soon as possible. If you continue to make on-time payments after one missed payment, it will put you on the road to credit score improvement.

Automatic payments or payment reminders can help you make sure you don’t miss a payment in the future. However, you should always double-check to make sure the payment went through—you’re responsible for the payment no matter what.

3. Your credit limit decreased

Your credit utilization takes a hit when your credit limit drops since you have less credit available. Your credit card company can reduce your credit limit at any time without warning if it’s in your card agreement.

Credit card companies can lower your limit if you start making risky decisions like running a balance every month when you previously didn’t or you begin maxing out your card. They can also lower your limit if you aren’t using your credit card regularly.

How can I fix this?

If you noticed your credit limit was lowered, take a look at your credit card agreement. It will specify what your credit card company is and is not allowed to do. Oftentimes, agreements will state that the company can lower or raise your limit without letting you know.

It’s a good idea to call your card company if you notice a lowered limit. They will be able to tell you the reason for the limit change and might be open to restating it to the prior limit if you have a good credit history.

If your limit was lowered because of high utilization, aim to pay down your balance as quickly as you can. If your limit was lowered because of little activity, use your card for small purchases or recurring payments like subscriptions and utility bills.

4. You closed a credit card account

Closing a credit card lowers the average age of the accounts on your credit report. Credit age is the average time your accounts have been open and makes up 10 percent of your credit score.

Closing a credit card account also increases your credit utilization ratio since you have less available credit.

How can I fix this?

Try to avoid closing old cards if possible. You can put small recurring charges on your card and set up autopay every month to keep it active without frequent use.

Sometimes you need to close an account if annual fees are expensive or it’s too tempting to use the card. If you can help it, don’t close an account if you’re in the process of securing a loan or another credit card since the lowered score could hurt those applications.

The good news is that while your score will decrease right after closing the account, it will likely bounce back in a few months if you continue to practice good credit habits like paying accounts on time and keeping your utilization low.

5. You paid off a loan

Paying off a loan is something to be proud of, but it might cause a temporary dip in your credit store. Whether it will cause your score to decrease depends on a few factors.

● Your credit mix changed. If the loan you paid off was your only installment account (such as a loan), you may see a dip in your score because you no longer have a mix of installment accounts and revolving accounts (such as credit cards) in your credit report.

● The age of your credit history changed. If the loan you paid off is one of your oldest accounts, this can reduce the average age of all your open accounts.

It’s important to note that closed accounts won’t stay on your report forever. If you paid off the loan in full without missing a payment, the account will stay on your account for 10 years. If you missed a payment, a negative mark will stay on your credit report for seven years.

How can I fix this?

Accounts will eventually fall off of your credit report, so the best thing to do is to practice good habits like keeping your balances low and keeping up with payments on your other accounts.

Keep track of the date you pay off accounts so you have an idea of when it could fall off your credit report. You should also check your credit report periodically to see if it’s still there.

6. You recently applied for a credit card or loan

Applying for new credit can shave a few points off of your credit score initially. When you apply for a new card or a loan, you trigger a hard inquiry, also known as a hard pull. A hard inquiry happens when you give someone permission to check your credit history.

Hard inquiries directly impact your credit score and account for 10 percent of your score. One hard inquiry typically has a small impact on your score, but a lot of pulls in a short period of time can make you appear risky to creditors. Experian says each inquiry averages a drop of about five points. Hard inquiries are inevitable when it comes to borrowing money for things like a new car or home. Inquiries will fall off your credit report after about two years, but can fall off sooner if you’re in good financial standing.

How can I fix this?

Ideally, try to apply for a new line of credit only when you need it. This will help minimize the number of hard inquiries in your credit report. When you need to apply for a new card or loan, space out your applications to minimize the impact to your score.

You should also do your research before you apply for a loan or credit card to get an idea of a lender’s requirements. This can help you get a sense of whether you’ll be approved and avoid incurring a hard inquiry without securing a loan or credit card.

7. You opened a new line of credit

Being approved for a new line of credit can cause a drop to your credit score by lowering the average age of your credit. Additionally, opening a new card could hurt your score if you plan on making a large purchase, which increases your credit utilization ratio.

How can I fix this?

You’re bound to open a new line of credit at some point. The good news is that your score will likely only decrease six to 12 points, according to CNN. The best way to make sure your credit score bounces back is to continue making on-time payments and, if it’s a credit card, keeping a low balance.

8. You recently experienced a bankruptcy or foreclosure

Derogatory marks, including bankruptcy, foreclosure and civil judgments, are huge signs to lenders that you aren’t managing your money well.

Each lender decides how these events are factored into their criteria, but most derogatory marks will likely tank your score.

How much your score will decrease depends on your credit score prior to filing bankruptcy or foreclosure. Someone with an average credit score of 680 may see their score decrease by 130-150 points due to bankruptcy. On the other hand, someone with a higher credit score of 780 could see their score drop by 200-240 points.

How can I fix this?

If you’re facing bankruptcy, foreclosure or something similar, look into what alternative options are available to you. You may be able to negotiate with your creditors or find help from a credit counseling agency in lieu of filing.

If foreclosure or bankruptcy is unavoidable, the good news is that the effect of negative items lowers over time. So as long as you’re practicing good credit habits, you should eventually see your credit score climb back up.

9. Your account was sent to collections

While your credit score is mainly impacted by credit cards and loans, having an account in collections can lower your credit score. Any debt, including credit cards, loans and utilities, can be sold to a collections agency and reported to the major credit bureaus.

If you miss a payment for 30 or more days, your account can be placed in collection status. This will result in a derogatory mark that will stay on your report for up to seven years after it’s paid off.

The good news is that paid collections don’t hurt your credit score, but unpaid collections do. So if you’re able to quickly pay off a collections debt, you likely won’t see an impact on your score.

How can I fix this?

If you have an account that’s been sent to collections, it’s best to tackle the problem head-on. Once you figure out who you owe (your creditor or an outside debt collection company), commit to paying off your debt as quickly as you’re able.

It’s also worth negotiating with your creditor or debt collection agency to see if you can work out a plan to pay off your debt over a period of time rather than one lump sum payment.

Once you pay off your debt, practicing good credit habits with your other accounts will help you rebuild your score.

10. Your co-signer on a loan or credit card fell behind on payments or has a high balance

The act of co-signing on an account doesn’t have a direct impact on your credit score on its own. However, your co-signer’s bad habits could bring both of your scores down. Any late payments, high balances or other activity on the account reflects on your score.

How can I fix this?

Speak to your co-signer before agreeing to co-sign for them or with them to make sure there’s a plan in place to pay off the debt. This is also a good time to establish any ground rules. As a co-signer, ask to have statements sent to you, and check the account often so you can be aware of any potential problems.