Experiencing a sudden drop in your credit score can be alarming, especially if you’re preparing to secure a mortgage or trying to improve your credit rating. The worst part? Your credit score can potentially drop significantly with no defined limit. A late payment, balances too high, or a closed account can all cause a drop in your credit score. If you ask, “Why did my credit score drop?” we’re here to help. Find the factors and what you can do here.
10 Factors that may have contributed to the lowering of your credit score
If you find a credit score drop, the next logical question is, “What affects credit score?” There are many different factors that go into your credit score calculation. You may feel like you need a crystal ball to predict how your score will change monthly because of the many factors that influence it. But there are a few predictable elements within your control. If you understand how a credit score is weighted, you can better take action to raise your credit score over time.
MoneyLion offers a free and convenient way to find offers from our trusted partners to help you improve your credit — such as credit monitoring, credit report disputes, and getting credit by paying bills. A good credit score can lead to lower interest rates and increased borrowing power on loans and credit cards.
Below are common factors that could contribute to a drop in your credit score, each explained in detail:
- You missed a credit card or loan payment.
- One of your accounts went to collections.
- You made a big purchase with a credit card.
- You closed one of your credit cards.
- Your credit card company lowered your credit limit.
- You applied for more credit.
- You declared bankruptcy.
- There’s incorrect information on your credit report.
- You were the victim of identity theft.
- You paid off a loan.
1. You missed a credit card or loan payment
Missing a payment can significantly lower your credit score in a short period. Your payment history is the most important factor in determining your credit score. It makes up between 35% of your FICO score and is “moderately influential” on the VantageScore system. Missing a single loan or credit card payment can seriously impact your score.
Lenders usually consider a payment late if it isn’t made 30 days after the due date. To avoid seeing a drop in your score, make sure you always make at least the minimum payment on all your loans and cards each month.
Are you having trouble remembering when all of your accounts are due? Set a reminder on your cellphone’s calendar a few days before your payment due date. Or, to avoid late payments, set up automatic payments for at least the minimum due.
2. One of your accounts went to collections
Late credit card and student loan payments aren’t the only delinquent bills that can lower your credit score. Noncredit accounts (like your phone bill or rent-to-own agreements) typically don’t hurt your credit score if you’re late on a single payment. However, the company that issues the service will hand your bill off to a debt collection agency if your accounts become seriously delinquent.
Collection agencies often report unpaid balances to credit reporting bureaus, called credit reporting agencies (CRA). This can cause your outstanding balance to end on your credit report and hurt your score. Keep track of all of your monthly bills and pay them on time to avoid a drop in your score.
3. You made a big purchase on a credit card
Excessive credit utilization can also negatively impact your credit score. Credit utilization refers to the amount of money you put on your credit cards every month. If you put a lot of money on your credit cards each month, you’re more likely to miss a payment, which can cause a drop in your credit score.
Credit card companies calculate your credit utilization on a rolling basis every pay period. A major purchase, like a new washer and dryer unit or new living room furniture, can sharply raise your credit utilization. Fortunately, you can counteract this drop in your score by paying off your purchase in full before the next billing cycle arrives.
4. You closed one of your credit cards
Closing unused credit cards might appear logical, especially if you’ve previously struggled with credit card debt. Unfortunately, closing current lines of credit automatically raises your credit utilization.
For example, let’s say you have two credit cards, each with a $1,000 credit line and you spend $500 a month between both cards. Your total available credit in this scenario is $2,000, and you spend $500 a month. That’s a credit utilization ratio of 25%.
If you close one of your cards and start putting all your expenses on one card, your credit utilization will be higher. Even though you’re spending the same amount each month ($500), your credit utilization ratio is now 50% because you cut your available credit in half.
If possible, try and leave available credit lines open rather than closing them. Just as importantly, make sure to avoid the temptation of actually using your available credit. Ideally, you want to keep your balance at or below 30% of your total available credit.
5. Your credit card company lowered your credit limit
Your credit card issuer might reduce your credit limit if you miss payments. A credit deduction has the same effect as closing one of your cards.
To counteract this decrease in available credit, it’s a good idea to limit the amount of money you put on your credit cards. This will lower your utilization rate. After a few months of on-time payments, your lender may allow you to apply for an increase in credit.
6. You applied for more credit
Lenders initiate a “hard inquiry” on your credit report when you apply for a mortgage or new credit card. Hard inquiries show up on your credit report and lower your score. When you need to check your score, you can do a “soft inquiry” through a credit monitoring service or your credit card’s app. Soft inquiries don’t lower your score or show up on your credit report like hard inquiries.
Hard inquiries lower your score because they indicate that you have been applying for more credit. Applying for too many lines of credit at once is a big red flag for lenders. Hard inquiries lower your score to discourage you from applying for too many loans at once. Don’t apply for any other credit if you’re ready to apply for a big loan like a mortgage or a new credit card.
7. You declared bankruptcy
If you declare bankruptcy, you can expect a serious drop in your credit score. Bankruptcy is a legal classification that absolves you of your debt in exchange for taking on a payment or restructuring plan. You should only file for bankruptcy as an absolute last resort — not as a “get out of debt-free” card.
There is some good news if bankruptcy is your only option. Bankruptcies don’t stay on your credit report forever. Credit reporting bureaus must remove bankruptcies from your credit report after seven to 10 years, depending on your chapter filing.
8. There’s incorrect information on your credit report
Have you been doing everything right, yet you’re still seeing a lower credit score? A surprisingly high number of Americans have mistakes on their credit reports that cause a lower score. According to data from the Federal Trade Commission, about one in five people has at least one mistake on one of his credit reports. Errors on your credit report can lead to a lower credit score than warranted.
The only way to tell if your credit report has a mistake is to read each one of your reports and hunt for errors. You’re entitled to one free pull of each of your credit reports every 12 months under the Fair Credit Reporting Act. You can get your free credit reports by visiting annualcreditreport.com. Some of the most common errors you can watch include:
- Items for someone with a name similar to yours.
- Payments listed as late or missed that you made on time.
- Not removing old data and items after they’ve expired.
- Accounts listed as “closed by lender” that you closed yourself.
- Loans, credit lines, and late payments are listed more than once.
- Incorrect spelling of your name or an incorrect Social Security number.
Report any mistakes to the credit reporting bureau that issued the report. If the error is on all three credit reports, you must report it to each bureau individually. The credit reporting bureau must investigate your claim and remove the item if it’s wrong.
9. You were the victim of identity theft
Identity theft victims may find their credit scores affected as fraudsters misuse personal details to open new credit lines or make significant purchases. For example, if they have a stolen credit card and the thief makes large purchases maxing out the card, they could see a major dip in their credit score.
Likewise, if your Social Security number and ID are stolen, the thief can use them to open new credit cards, max them out, apply for loans, or take other lines of credit. All of these actions can cause a huge drop in your credit score.
10. You paid off a loan
Unexpectedly, paying off a loan may lead to a credit score drop. Paying off debt can lower your credit score if it changes your credit mix, the length of your credit history, or your credit utilization ratio.
How to monitor credit fluctuations
It’s time to create a plan to fix your credit score. One of the best ways to keep track of your credit is by using a credit monitoring service. Credit monitoring services like the one available from MoneyLion allow you to track your score over time without impacting it.
Remember that credit score ranges from 300 to 850. If you’re solidly above 700, you’re already in the good to very good range on all scoring models. A score of 661 on the VantageScore model is already considered good. On the FICO model, you step into the “good” range with a score of 670.
If you’re applying for a loan soon or your credit score is low, monitoring your credit score can help you track positive changes and see how paying off debt could help boost your score.
Why does my credit score fluctuate?
Credit score fluctuations are normal. If they’re within 10 points as you use and pay back credit, there’s usually nothing to worry about. But if you see big credit swings or aren’t seeing consistent progress with credit building, you may need to take a deeper look at your credit report to identify total debt and other negative marks and make a plan to address them.
Monelion has excellent tools to help. In addition to credit score monitoring, you can find tips to improve your credit score in three months or raise your credit score by 200 points.
FAQ
Does checking your credit score lower it?
Checking your credit score doesn’t lower it. It’s considered a soft credit check when you check your score via a credit monitoring service. Unlike a hard credit check performed by lenders, a soft credit check doesn’t impact your credit score.
When do hard inquiries fall off?
According to Experian, one of the three credit bureaus, hard inquiries stay on your credit report for two years. However, they will only impact your FICO score for 12 months.
How long can a credit score update after payment take?
Your credit score can take 30 to 45 days to update after a payment. That’s because the three credit bureaus usually receive new reports from your creditors or lenders every 30 to 45 days.
