7 reasons your credit score could drop
The three major credit bureaus, Equifax, Experian, and Transunion, take many factors into consideration when determining your credit scores. While the biggest factor is whether you make your payments on time, other actions are monitored like if you max out your credit cards or apply for lots of credit. With that in mind, here are some of the most common things that can cause your scores to drop.
1. Late or missed payments
Payment history accounts for the largest part of your credit score, ranging from 35-40%, depending on the scoring model used. That means if you miss a payment or pay late and it gets reported, your score will drop. However, according to Experian, a missed payment can’t get reported until it’s at least 30 days late so you do have a little bit of a grace period.
If you are more than 30 days late on a payment, make it as soon as possible. The later a payment is, the more it can hurt your score. For example, if a payment is 60, 90, or 120 days late, it will be worse than if it was just 35 days late. Unfortunately, once a late payment hits your credit report, it will stay on your record for seven years. The best thing you can do is to make all of your upcoming payments on time.
2. Increase in credit utilization rate
A credit utilization rate, also known as a credit utilization ratio, is another important factor that can account for up to 30% of your credit score. It looks at how much of your available credit you have used on revolving credit lines like credit cards. For example, if you have a credit card account with a $2,000 credit limit and you keep a $1,500 balance, your credit utilization rate would be 75%.
The less credit you’ve used, the better as high balances are a sign of financial distress. So if you’ve recently used your credit cards and your balances have increased, you will see your credit score drop. You may also see your score drop if you have a balance on a card and the credit limit was recently decreased. The good news is, it can be an easy fix. By paying down your balances, your score will usually rebound pretty quickly.
The common rule of thumb is to keep your credit utilization rate below 30%, but the lower the better. Keep in mind that credit card companies typically report to the credit bureaus each month. It can be helpful to monitor your credit report and take note of when your balances get reported so you can plan to pay down your balances before the monthly reporting dates.
3. Recent credit applications
Credit bureaus monitor when you apply for credit and let a lender check your credit report and it accounts for up to 10% of your credit score. Note, there are two types of credit checks commonly used — a hard inquiry and a soft inquiry. Soft inquiries are often used when you’re just getting a quote to compare offers while hard inquiries are used to finalize a loan or other credit offer. Hard inquiries hurt your credit score while soft inquiries don’t.
So if you were recently shopping for a personal loan, a mortgage, or another type of credit line, and you agreed to a hard credit check, you will likely see your score drop a few points. That doesn’t mean you shouldn’t apply for credit but you should do so with discretion. Only let a lender perform a hard inquiry if you are seriously considering its offering. Too many hard inquiries are a signal that you may be having financial troubles.
If your score has dropped because of a hard credit inquiry, it will likely begin to rebound after some time has passed and will increase when the inquiry drops off after two years.
4. Closed a credit card or account
If you recently closed a credit account, that can cause a drop in your credit for one of two reasons.
First, your credit mix accounts for up to 10% of your credit score. Credit bureaus want to see a mix of different types of credit including installment loans like a mortgage and revolving credit accounts like credit cards. If you had one installment loan and three credit cards, and you paid off the installment loan, you’d only be left with revolving accounts which would be bad for your credit mix. You could fix this problem by opening up a new installment loan. However, a new loan can cause your score to drop temporarily until you pay the balance down a bit.
Second, the length of your credit history is also a factor that accounts for up to 15% of your credit score. Credit bureaus look at your oldest account, newest account, and average account age. If you close an account that happens to be your oldest, it could cause your score to drop by shortening your oldest account and average account age stats. In this case, you need to be sure to keep as many accounts open for as long as possible in the future.
5. Victim of identity theft
Another possible cause of a credit score drop is that you’ve been the victim of identity theft. If someone has stolen your information and used it to open accounts, apply for credit, or drive up your credit utilization ratio, it can harm your credit score.
In this case, be sure to notify the affected creditors and banks, put a fraud alert on your credit reports, and freeze your credit. From there, you can report the incident to the FTC and the police, remove the fraudulent information from your credit reports, and update passwords, cards, and other things as necessary. A service like LifeLock can also help to protect your identity going forward. Once the information is removed from your credit report, your credit score should rebound.
6. Mistakes on your credit report
The information in your credit report could also contain mistakes. It’s a good idea to check on your reports regularly with all of the credit reporting agencies to make sure everything is accurate and up to date. If your score seems to drop for no reason, something could have been misreported. If you do find a mistake, you can file a dispute. From there, the credit bureau will communicate with your creditor to work to clear up the misunderstanding. If the item is found to be a mistake, it will be removed and your credit score will go back up.
7. Foreclosure or bankruptcy
Lastly, if your home goes into foreclosure or you file for bankruptcy, both of these will impact your credit score significantly. These are both major defaults that future creditors will see as red flags. However, as time passes, they will impact your credit less and less until they fall off your report. A foreclosure stays on your credit report for seven years, while bankruptcies stay on for seven to 10 years, depending on the chapter you file.
To figure out what may have caused your credit score to drop, check your credit reports. You can access one free credit report each year from freeannualcreditreport.com. Look for one of the above reasons to see if they may be the cause. To stay in the know, you may also want to sign up for a credit monitoring service like Credit Karma or Credit Sesame.
Frequently asked questions about credit score drops
Now here’s a look at answers to some of the most frequently asked questions about credit score drops.
1. Why did my credit score go down when nothing changed?
Credit scoring models consider a wide range of factors to determine your score. If your score changed, there is some underlying trigger that caused it such as the seven above. If you’d like help, the major credit bureaus and other third-party companies offer monitoring services that alert you when any changes to your credit report occur. You can receive notifications about updates to your report, score fluctuations, and much more to help you understand why your credit score might have changed.
2. Why did my credit score drop 30 points just for using my credit cards?
Credit utilization is a big factor in the credit scoring models so if your credit card balances have increased, you’ll likely see a big drop in your score. It’s not uncommon to see a 30-point change if you significantly increase your credit utilization.
3. How do I prevent my credit score from dropping?
First and foremost, make sure you make all of your payments on time. If you are late, don’t wait more than 30 days to catch up. Beyond that, ensure that all of the information on your credit reports is correct, keep your credit utilization ratio down, keep your accounts open as long as possible, and ensure you have a mix of both loans and credit cards.
If you do want to look for new credit, be mindful of hard inquiries. Usually, you can get a quote with a soft inquiry. Further, if you perform a group of hard inquiries for a car or home loan within a set period of time (often 14-45 days), they are generally counted as one.
4. What is a normal credit score drop?
According to MyFico, the amount your credit score drops depends on a number of factors such as your starting score, past late payments, and more. However, when looking at two typical credit profiles, a payment missed by 30 days could cause a drop of anywhere from 17 to 83 points.
Generally, you will see a bigger drop if your score is higher at the start with fewer derogatory marks. Maxed-out credit cards have an even bigger impact, causing scores to drop anywhere from 27 to 128 points.
5. What are the most used credit scoring models?
The two most commonly used credit scoring models are known as FICO and Vantage Score. The latest FICO score is known as FICO 9 and the latest Vantage Score is Vantage Score 3.0.