Why Did My Credit Score Drop?
If your credit score dropped overnight, don't panic. Review these possible causes behind your credit score's fall, and score-boosting steps to take next.
Reviewed by: Adam Liebich, BECU Credit Bureau Usage Manager
A dip in your credit score can be alarming, particularly if you don't recall any recent, unusual events affecting your finances. Maybe you noticed your score dive after a lender turned you down for a loan, or a credit card company passed on your application for new credit. Or perhaps you've seen your score slowly sinking, month after month. Then again, a fluctuating credit score can also give pause.
Your credit score, also known as your FICO Score, is important because it's what 90% of the top lending institutions use to estimate the risk of lending money to you. If you're wondering why your score dropped for no reason, don't panic. Here are seven reasons why your credit score might drop, examples of how it happens and what you can do to reverse the trend.
You Made Late Payments
Even a single missed debt and bill payment can cause your credit score to drop significantly. That's because your payment history makes up 35% of your credit score — the biggest single piece of your score's pie. A history of on-time payments on your credit report boosts your score. The three credit bureaus (Experian, Equifax and TransUnion) keep track of your credit history through your credit reports.
Most creditors (such as your credit card company) report missed payments at these intervals:
- 30 days (about one month)
- 60 days (about 2 months)
- 90 days (about 3 months)
- 120 days (about 4 months)
- 150 days (about 5 months)
Finally, if you haven't paid your credit card bill or other debt in a very long time, the credit card issuer reports it as a "charge off" or will send the debt to a debt collection agency. The more you fall behind, the more unpaid debts lower your score. In general, national credit bureaus can keep negative information on your report for up to seven years.
Example: You don't realize you missed two payments on an infrequently used credit card. Creditors report late payments to the credit bureaus, and your score drops due to the negative information on your credit report.
What to do: Set up automatic payments for your credit cards and loans if you can, to make sure you don't miss a payment. If you're in a financially difficult situation, speak with your creditor right away to see if you can create a payment plan that won't hurt your credit score. Or sign up for credit counseling to prevent payment issues or delinquency.
You Opened a New Card
You may notice a few points fall off your credit score when you open a new credit card. While more available credit is good for your credit score, the average age of your credit affects your credit score, too. Older credit increases your score, while new credit decreases your score. New credit makes up 10% of your credit score.
Also, when you apply for a new credit line, the credit issuer will make a hard inquiry, which can cause your score to drop. Multiple applications and hard inquiries for new cards within a short time can rapidly reduce your score, with each hard inquiry causing a drop of roughly five points. However, multiple applications over the course of a month as you rate-shop for a loan (home, auto or student) won't lower your score in the same way.
Example: You apply for a travel credit card to collect miles or points. The credit card issuer approved your application, so you apply for two more travel cards through different card issuers, but you aren't approved. You now have three hard inquiries on your credit history, which lowers your score by 15 points for about one year. The brand-new credit card brings down your credit's average age and further lowers your score.
What to do: Don't impulsively apply for credit. Once approved for a new credit card, don't apply for more cards until your score recovers from the newly added account and the hard inquiry. FICO credit scores only consider inquiries within the past 12 months.
Your Credit Utilization Ratio is High
Your credit utilization ratio is the amount of credit usage out of all the available credit you can access and makes up 30% of your credit score. To find your credit utilization ratio, divide your total outstanding debt by your total credit limit. Also, if you've recently charged a lot on your card, your score will decrease as the amount you owe increases. In general, a higher credit score or good credit score goes to those who keep their credit utilization ratio under 30%.
Example: Suppose you have cards with limits of $5,000, $10,000 and $7,000 for a total of $22,000. Uh-oh, you realize you've spent $10,000, whether on one large purchase or across three cards. You divide $10,000 by $22,000 and discover you're spending 45% of your credit limit.
What to do: If your credit score drops due to high balances, make regular monthly payments until your credit utilization rate is below 30%. With the example above, that means getting your balance below $6,600.
You Paid Off an Installment Loan
Yes, even paying off a loan can cause credit scores to drop. "Credit mix" makes up 10% of credit scores, and two account types make up your credit mix:
- Installment loans: A loan repaid regularly for an established, set amount. This includes student loans, personal loans, mortgages and car loans.
- Revolving credit accounts: The lender sets the borrowing limit. This includes credit cards, retail cards and home equity line of credit (HELOC) accounts.
Example: You paid off your auto loan, which caused your score to drop because it was your only installment loan. The rest of your accounts are revolving accounts and you're spending more than the 30% ratio.
What to do: Don't get another installment loan just to bump up your credit score or diversify your credit mix. Instead, keep making regular payments (and, if possible, more than the minimum) on revolving debts. Apply for another loan, such as a mortgage, personal loan or car loan when you have the financial cushion of a lower credit utilization rate.
You Closed an Account
If you've recently closed a credit card account, you may be surprised to learn that it could lower your credit score. That's because you've probably reduced the amount of credit available to you, which changed your credit utilization ratio.
Example: Suppose you had three credit cards with limits of $5,000, $10,000 and $7,000. Combined, you have $22,000 available to you for spending. You decide to close the $7,000-limit card. Now you only have $15,000 available to you.
What to do: You can ask your issuer to transfer the credit limit of the card you want to close to another card, if you have more than one card with that issuer. This will lead to a credit limit increase on your existing card. If you haven't yet closed a card but aren't using it, make sure you review your credit report frequently to ensure someone else isn't using it.
You're an Identity Theft Victim
Your credit score might drop if someone used your identity to apply for cards, a mortgage or other loan. A drop can happen when your credit file starts filling up with hard inquiries or requests for credit cards. If someone committing identity theft applies for a credit card or a mortgage in your name, late payments and high credit card balances will also deplete your credit score.
Example: You notice your credit score dropped. You check your credit history with the credit bureau and discover that your account lists several cards you've never had, adding to your debt on paper.
What to do: First, order your credit report from the three bureaus to see if someone has been applying for or using credit in your name. Then, follow the government's advice at IdentityTheft.gov, which may include adding a fraud alert to your account so no one can open new accounts in your name.
Your Credit Report Contains Mistakes
If your credit score drops and none of the above reasons apply, know that credit report mistakes could drag down your score. FICO depends on your credit history to determine your credit score. Common credit report mistakes include:
- Closed credit accounts reported as open.
- Credit accounts incorrectly reported as late.
- The same debt listed more than one time.
- Incorrect credit card balance or credit limits.
- Incorrect delinquency dates or other negative information.
Example: You review your credit report and notice your student loan is listed twice, which makes it look like you have more debt than you carry. This leads to a lower credit score.
What to do: Follow the Consumer Financial Protection Bureau's advice for disputing errors on your credit reports, including disputing with the company that provided the information and the major credit bureaus.
Follow the Credit Monitoring Checklist
Following these steps can help you maintain your credit score:
- At least once a year, check your credit reports, credit history and credit score to see whether you have excellent or fair credit. (If you're a BECU member, you can check your credit score for free when you log into online banking.)
- Order your credit reports from each of the three major credit bureaus, as you're entitled to a free report every 12 months, and requesting your report doesn't hurt your credit score.
- Check for warning signs that could lead to rapid or slowly decreasing credit scores.
- Create a plan to improve your score.
These are some of the warning signs to check for:
- Late payments: Make sure you aren't missing payments on credit cards or loans. Set up automatic payments if possible.
- New credit cards or loans: Ensure you recognize all accounts listed on your credit report to avoid fraud.
- Multiple hard inquiry reports: Limit new-credit applications to every few months and wait for your score to recover before applying again.
- Credit utilization above 30%: Make plans to pay off credit card debt.
- Repaid installment loan: Continue to make regular payments on revolving credit debt and wait until you need more installment credit before applying.
- Lower credit limits available to you: Find out why a creditor lowered your limit and ask what you can do to regain your previous limit.
- Closed credit cards: If you close a card, it can reduce the amount of credit available to you.
- Mistakes and errors: Dispute credit errors with the company that provided the information and the credit bureau.
- Accounts and amounts you don't recognize: Take steps to protect yourself from fraud.
Credit Reporting Agency Help
If you explore all these potential causes for a decrease in your credit score and you still need help understanding what's going on with your credit, you can reach out to the credit reporting agencies. They work directly with consumers on changes to credit information and might be able to answer your questions.
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Lora Shinn
Contributor