Why did my credit score drop?, It’s easy to feel worried when you look at your credit score and it’s not what you expected. Whether the score decreased a little or a lot, knowing why will help you fix it. Your credit score is determined by a number of different factors, and even good borrowers can experience unforeseen credit score drops. Read this article for the most frequent causes of your credit score falling and how to deal with them.
How Credit Scores Are Calculated (And Why That Matters)
Before we dig into why your score dipped, let’s look at how they’re figured. The most common score calculation method, FICO, uses five key factors:
The five FICO factors are explained in our comprehensive credit score article:
Any significant changes in these categories can alter your score (sometimes drastically). Here are some of the usual suspects:
The most common reasons why your credit score might have decreased:
1. There Was a Late or Missed Payment on your report
Payment history makes up the largest percentage of your score. Therefore, one late payment being reported to the credit bureaus will result in a notable score decrease. Lenders are generally required to report a payment as late once it’s 30 days past the due date. The longer it has been past due, the more damage it can cause. A payment that’s 60 or 90 days past due will result in more harm than a 30-day late payment.
What to do: Bring the account to a current balance as quickly as possible. If this is your first late payment, speak with your lender and request a goodwill adjustment, have it removed, and always pay on time going forward (automatic payments can help).
2. Your credit utilization rate has increased
Credit utilization is the percentage of credit card balances you have in relation to your total available credit limits. Large purchases, balance transfers, or a reduced credit limit could be responsible for the change. It is recommended that utilization remain below 30% but many scoring models favor people with very low utilization ratios.
What to do: Pay down outstanding balances as much as possible. If appropriate, ask for an increase in your credit limit so that your utilization ratio is lower. This is a core credit building strategy that will improve your score when the new balance appears on your report.
3. There was a hard inquiry added to your report
A hard inquiry on your credit report is typically associated with applying for a new credit account such as a credit card or mortgage. When lenders check your credit, it will ding your score by a couple of points each time. If you have several in a short amount of time or an otherwise weak credit report, it could take a toll.
What to do: Limit the number of new credit applications that you submit. The exception is when you’re rate shopping for the same type of loan like an auto or mortgage-usually it’s treated as one inquiry when performed in a short amount of time.
4. There was a closed credit account or a reduced credit limit
Closing a credit card (by you or the lender) reduces your total available credit. An existing balance will now represent a higher percentage of the lower limit-boosting your utilization ratio. This will negatively impact your score. Lenders can reduce the limit of existing credit cards as well, resulting in the same negative effect.
What to do: When you decide to close a credit card, you may want to close the new one and leave the older ones open to preserve credit history length. Think twice before closing credit cards and consider the impact on your overall credit utilization.
5. There was a derogatory mark on your report
A serious negative account on your report, such as a collection, charge-off, foreclosure, repossession, or bankruptcy will significantly lower your score. These are considered extremely risky and remain on your credit report for between seven and ten years depending on the type of item.
What to do: Check your full credit report from AnnualCreditReport.com for all derogatory marks, and dispute any errors with the credit bureau responsible for the mark. If it is correct, then you’ll need to focus on getting positive information onto your credit report by always paying off all current accounts on time and bringing down the credit card balances.
6. Fraud or identity theft occurred
A sudden credit score drop is sometimes not your fault at all. When someone takes over your identity, they may apply for and open various new credit accounts. If there are many fraudulent late payments or new accounts with high utilization, it can devastate your score.
What to do: You should immediately check your credit reports to make sure that there are no unknown accounts or inquiries, then place a fraud alert or credit freeze with all three major credit bureaus (Experian, Equifax, TransUnion) as well as reporting the fraud to the Federal Trade Commission at IdentityTheft.gov.
7. The average age of your accounts has decreased
The average age of your credit accounts for 15% of your total score. When you open a new credit card, it can decrease this average number by a small but noticeable amount-and if you open multiple cards at the same time, the decrease is compounded. Luckily, this will reverse itself over time as your newer accounts age.
How to understand your credit report and locate the issue
The best method to understand why your score decreased is to look at your credit reports. Each of the 3 major credit bureaus will provide a free report for
free to you each week at annualcreditreport.com Here’s what you should be looking for when examining your report:
- Accounts you did not open appear on your credit report
- Late payments of 30, 60, or 90 days
- Hard inquiries you did not give permission for that appear on your credit report recently
- A credit limit decrease on an existing account
- Collections or charge-offs
- Public records (e.g. Bankruptcies or judgments)
If you spot an error you are legally allowed to dispute it and are generally guaranteed a response within 30 days from the bureau investigating the issue.
Things to do to make your credit file healthier in the future
Knowing why you received a decrease means you know where you need to improve. Some great ways to boost your credit file include:
- Make payments on time: Try and set calendar reminders or auto payments for all your accounts. There is no substitute for making all payments on time every month.
- Decrease utilization: You want to utilize less than 30% of your available credit across all your revolving accounts, and the less the better.
- Avoid new hard inquiries: You do not need to apply for new credit unless you require it.
- Keep older accounts open: Your credit history is helped by not closing down old credit cards, even if they do not get a lot of use.
- Have a mix of credit: A healthy credit profile will likely consist of revolving credit and installment loan products. You could consider a credit builder loan if you have a very thin credit file.
- Monitor your credit on a regular basis: Take advantage of credit monitoring to alert you to any changes in your account, and dispute any errors.
How long will it take to strengthen your credit file again?
Each situation, much like what credit score you start with, will take a different amount of time to correct. High utilization could take anywhere from a month or two to fix, once you begin paying balances down. Hard inquiries will be removed completely from your credit report after two years, and impact your score significantly less after one year. Issues like missed payments, charge-offs and bankruptcy are more damaging, and will take seven to ten years to fade from your credit report, but will have less impact on your score as the years go on and you start making good credit decisions.
There is not really any shortcut to “fix” your score so it goes up by the date X, by X amount of points. It really comes down to the actions taken over time; the building of a responsible credit report.
Frequently Asked Questions (FAQ)
Will checking my own credit score affect my score?
No. When you pull your own score this is called a soft inquiry and does not lower your credit score. Your score only drops if lenders make a hard inquiry on your credit.
Will paying off my loan harm my credit score?
It may lower your score briefly. When you pay off an installment loan you close the account and may decrease your credit mix or the average age of your credit accounts. Most dips should be minimal and short-term.
How frequently are my credit scores updated?
Your credit score is calculated any time your credit file is accessed and your score is generated. The credit bureaus will receive monthly updates on your accounts from your lenders on average so it is likely to change around on a monthly basis.
Conclusion
It is discouraging when your credit score falls, but rarely is the decrease permanent. The first step is to determine precisely what contributed to the change in your score. Once that’s identified, a concise credit repair plan targeting responsible payment practices, low credit utilization and smart credit use will gradually help to rebuild your credit file. Consistency is your greatest weapon.
If you are trying to bulk up your credit history or build credit after an unfortunate period, know that it is achievable to make improvements. Make a practice of checking your credit reports frequently, dispute inaccurate information immediately and rebuild your credit account by account and month by month.