Credit scores fluctuate—it's their nature. But if the story ended there, you wouldn't be asking, "Why did my credit score drop?" Every point indicates your overall financial health and ability to manage money properly, so it's only natural to seek out the reason for a decline. Firstly, don't take it personally. Secondly, decreases can happen for several reasons. Sometimes it's of your own doing. And sometimes it's not.
Your credit score may drop due to late or missed payments, increases in credit utilization, account closures, hard inquiries, being a cosigner on loans not being paid, reporting errors, and identity theft. You should review your credit report regularly and know how to fix these common issues.
Don't worry; we won't leave you hanging. In this post, we'll reveal the answers to common questions about credit score drops, outline the key reasons for declines, and tell you how to fix them. Let's get started!
Why Did My Credit Score Drop For No Reason?
You've spent years building up a credit profile you can be proud of, so it can be fairly shocking when there's a sudden drop in your score, and you don't know why. The fact is that there's always a reason.
1. You Missed a Payment
With payment history being the factor that holds the most weight when determining a credit score, a missed or late payment can cause a major credit score drop. In fact, FICO conducted simulations to identify how various credit events can impact a score. Their missed payments data revealed the following consequences being in arrears can have on different profiles:
|Credit Profile||Fair / Good||Very Good / Excellent|
|30 Day Missed Payment||17 to 37 point drop||63 to 83 point drop|
|90 Day Missed Payment||27 to 47 point drop||113 to 133 point drop|
Unfortunately, the impact of a missed payment is immediate and devastating. What's worse is that it can take up to a year for a credit score to recover—even longer if a missed payment is reported to collections.
The fix: Whether accidental or not, catch up on all outstanding amounts immediately. The longer you wait to settle your debt, the more your score will decline. You should also consider setting up payment reminders or activating auto-pay features on your bank account to avoid missed payments in the future.
2. Your Credit Utilization Increased
Your credit utilization ratio is your total owed versus your total available credit. While this amount constantly fluctuates as you buy on credit and repay debt, what you owe shouldn't exceed 30% of what you have available. According to Rod Griffin, senior director of public education at Experian, high credit utilization can deliver as much as a 50-point blow to your credit score.
An increase in credit utilization can occur for a variety of reasons:
- A creditor decreased your credit limit, effectively increasing the percentage of your credit usage.
- You recently charged a large purchase to a credit card, thereby increasing your credit usage.
- An account closed, decreasing your total credit available.
- Your lender reported a higher balance because you missed paying before the billing cycle ended.
The fix: Get your credit usage below 30% by paying down high credit balances as quickly as possible. You can also ask lenders to increase your credit limits so that your credit usage is lower. Lastly, spread purchases over several cards so that your balances remain low, and make payments several days before the billing cycle ends.
3. You Closed an Account
Closing an account can affect your credit report in two key ways: 1) it shortens your credit history if the account is removed from your report, and 2) it increases your credit utilization ratio.
In the first instance, scoring models like FICO and VantageScore will continue to include a closed account in your average age of credit calculations. Positive accounts will stay on your credit report for 10 years, while negative accounts remain for seven years. Once a closed account is removed from your report, you can expect a decline in your credit rating. In addition, some closed accounts might not count toward your average age of credit, so it might hurt you if future lenders use scoring models that don't take these accounts into consideration.
In the second instance, closing a credit card reduces your available credit even though your total debt remains the same. In turn, this increases your credit utilization ratio if you have other accounts with balances. Unfortunately, credit card companies can close your account without your authorization and knowledge, so it's something to watch out for if you see any changes on your report.
The fix: Check your credit utilization ratio. If it's too high, reduce the balances on some of your open accounts or ask for credit limit increases where possible. You can also open a new account. Although the initial hard inquiry might drop your score slightly, it can boost your overall rating in the long term. If you're paying for credit cards you no longer use, consider asking your lender if there's a better card option.
4. There Was a New Hard Inquiry
If you recently applied for a new line of credit or a credit increase, the lender has likely pulled your credit report. This creates a hard inquiry, which can drop your score by up to five points—even if you weren't approved.
Although the impact on your credit score is temporary, and the hard inquiry will likely fall off your report within two years, too many hard inquiries in a short period can take a massive chunk out of your rating.
The fix: While there's nothing you can do about legitimate hard inquiries, you will want to check your report for incorrect, unauthorized, and fraudulent events. If you find an issue, you can dispute it with the credit bureau in question. They are required to investigate the matter and correct any inaccuracies. If you simply submitted too many credit applications in a short timeframe, be cautious in the future to protect your score from an excess of hard inquiries.
5. You Co-Signed a Loan that's Not Being Paid
Besides being able to help someone you care about acquire credit, there are few upsides to co-signing a loan. The reality is that you are equally liable for the debt. If the person you co-signed for doesn't abide by the agreement or make payments on time, it will negatively affect your credit score.
Perhaps more detrimental is the fact that you may only find out once the loan is in default, the account is severely delinquent, and you owe a crazy lump sum to void being sued. In this case, you not only have to take up the responsibility of paying the debt but also deal with a lowered credit score that could take years to improve.
The fix: If the situation isn't too dire, you might be able to request a co-signer release. Sometimes a lender will remove a co-signer from a loan agreement if the borrower makes a series of payments on time. A less appealing option is to catch up on payments as quickly as possible. Unless you explicitly trust the person and know them to be consistently responsible in their behaviors, don't co-sign a loan.
6. There's An Error on Your Credit Report
Even if you're doing everything right, creditors can sometimes make reporting errors, such as transposing numbers, reporting a payment as late when it wasn't, or reporting a payment to the wrong account. A Federal Trade Commission study reveals that 20% of consumers in the U.S. alone are affected by reporting inaccuracies.
These mistakes can trigger a drastic plummet in your score, which is why you need to review your reports from TransUnion, Experian, and Equifax regularly. Legally, you're entitled to one free report from each bureau per year, so don't waste the opportunity. You can also sign up for a credit monitoring service like Credit Karma or Experian Credit Monitoring so that you receive notifications whenever there's a change.
The fix: When checking your report, make sure your personal and account information is accurate. If you spot an error, immediately take action by disputing it with your lender and the credit bureau by phone or in writing. Each bureau has a specific process for handling disputes, which you can find here: Equifax, TransUnion, and Experian. Be prepared to provide supporting documents to back up your claim.
7. You're a Victim of Fraud or Identity Theft
Probably the most terrifying reason for a drop in your credit score is identity theft. If fraudsters have access to your personal and financial information, they can wreak havoc on your score by opening accounts, taking out loans, and more.
The fix: File a report through IdentityTheft.gov and then put a security freeze on your credit reports directly with the credit bureaus here: TransUnion, Equifax, and Experian. You should then create a recovery plan and monitor your credit closely. Once things have been corrected, you can temporarily or permanently unfreeze your reports when you want to apply for credit.
Why Did My Credit Score Drop After Paying Off Debt?
Paying off an installment debt can sometimes have the opposite effect of what you expect. Yes, making monthly payments on time can boost your score, but there are times when paying off a loan might decrease your rating.
- It can change your credit mix (a.k.a. credit diversity), which refers to the different types of credit you manage. Ideally, you want a variety of credit lines. Paying off a loan can reduce your mix.
- It increased your overall credit utilization by decreasing your total available credit.
- It was your only account with a low balance, so now all you're left with is high balances on active accounts.
- It can shorten your credit history and decrease your score when it drops off your report. If you paid off a loan account a while ago and it has subsequently been removed from your report, this could likely be the reason for an unexpected drop in your score.
Paying off a loan is a huge relief. However, think about how you can strategically do it without affecting your score. Try to ensure other account balances are low and that your credit utilization won't exceed 30% if your loan account closes.
Why Did My Credit Score Drop When My Balance Decreased?
Although you should keep your credit utilization ratio below 30%, a utilization rate of 1% is better than 0%. A zero balance on your accounts tells lenders that you're not making purchases, which doesn't make you a good prospect for them. Try to use your credit card in small, controlled ways each month so that you're making purchases and paying them off without unintentionally ruining your credit score.
Don't panic if you notice your credit score drop. It's a relatively common experience, and it doesn't necessarily indicate you did something wrong. However, it's important to understand why your score dropped and take immediate action to fix it. The issues listed above are a good starting point for understanding what's going on with your report, so use it to evaluate your score. Be sure to keep monitoring for any additional changes.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.