It’s normal for credit scores to fluctuate from one month to the next.
No one should lose sleep over a few points since they can be lost and gained back easily. But if you see a big drop—of 20 points or more—it’s likely that something negative appeared on your credit reports.
If you’re asking yourself, “Why did my credit score drop?” take a look at these likely reasons and corresponding tips for what to do about each of them.
7 reasons why your credit score dropped
Your credit scores are based on a variety of debt activities that you conduct day-to-day, so it can be difficult to find the culprit when they drop. If your scores fell and you’re not sure why, it’s likely one of these seven reasons:
1. You missed a debt payment
Missing just one payment on a credit card or loan can cause your credit scores to drop as much as 15 to 80 points or more.
That’s because payment history is the biggest factor in calculating your FICO credit scores. It accounts for more than a third (35%) of your scores. If a creditor reports you as 30 days late on just one debt payment, your scores can take a big hit.
Even if you pay the overdue balance, the missed payment will stay on your credit reports for seven years, but fortunately you can regain the points back over time.
Tip: Be proactive in avoiding missed payments by setting up autopay. If you think you might miss a payment, see if you can change your due date or ask the creditor if they offer hardship assistance.
2. Your credit card balance(s) increased
The second biggest factor that determines your credit scores (30%) is your utilization ratio, also known as your debt-to-credit ratio (DTC). DTC looks at how much of your available revolving credit you’re using, and the less the better. So if your credit card balances increase, your scores can drop.
3. You closed a credit card or pay off a loan
Paying off a credit card or loan, and then closing the account, might seem like a good financial move, but unfortunately it can reduce your credit scores for several reasons:
- You may have less available credit (which increases your DTI).
- It can reduce your average length of credit history, which makes up 15% of your credit scores
- It can reduce the mix of account types you’re using, which makes up 10% of your scores.
If a creditor closes your account due to non-payment, it can cause an additional hit to your scores and make it difficult to qualify for new financing.
Tip: Loans automatically close once they’re paid off, but you can and should avoid closing your credit card accounts, especially the account that’s been open the longest. If a creditor automatically closes your credit card due to inactivity, call and ask to have the account reinstate the account.
4. You applied for a new credit card or loan
Every time you apply for new debt, whether it’s a mortgage, personal loan, student loan, credit card or otherwise, your credit scores can drop by a few points. That’s because new credit applications, also known as “hard inquiries,” make up 10% of your credit scores.
If your application is approved, you may see an additional drop in your scores, since new accounts reduce the average age of your credit accounts.
Tip: If you’re shopping around for financing, time your applications wisely. Multiple applications for one type of account (such as a car loan or mortgage) will only count as one hard inquiry if they’re all made within 30 days.
5. Other negative marks
If you miss several consecutive payments on a debt, the creditor may take action that causes more negative information to appear on your reports and cost you additional points from your scores. Depending on the type of debt, this can include:
- Selling the account to a debt collector
- Vehicle repossession
- Home foreclosure
Tip: You can often negotiate with debt collectors to settle your debt for a portion of the balance owed. While paying off a collection account may help you get approved for new financing or even avoid a lawsuit from the collector, it won’t necessarily improve your credit scores.
6. You filed bankruptcy
Bankruptcy is one of the most negative items that can appear on your credit reports, since it shows creditors that you’re unable to pay back your debt.
If you file bankruptcy, you can expect to see your scores take a large drop, and the higher your scores were before filing, the more points you’ll lose. Someone with good credit scores can expect a drop of 100 points or more.
Tip: You can speed up the process of recovery after bankruptcy by adding positive information to your credit reports. One way to do this is by having a friend or family member add you as an “authorized user” to a credit account that’s in good standing. You can also try applying for a secured credit card.
7. Incorrect information
If incorrect information appears on your reports, whether it’s due to a creditor’s error or identity fraud, your scores could take a hit.
If you find an error on your credit report, you can dispute the incorrect information. Filing a dispute only takes a few minutes and it’s free to file, so you should never pay a third party to file a dispute on your behalf.
Keep an eye on your credit reports
For anyone wondering, “Why did my credit score drop?” there can be several answers, from something you did inadvertently to an error that showed up on your credit report.
If your scores dropped and you’re not sure why, the best first step is to take a careful look at all three of your free credit reports. Be sure to note incorrect or unfamiliar information, and let the credit bureau know if you find something that doesn’t belong.
Written by Sarah Brady | Edited by Rose Wheeler
Sarah Brady is a financial writer and speaker who’s written for Forbes Advisor, Investopedia, Experian and more. She is also a former Housing Counselor (HUD) and Certified Credit Counselor (NFCC).
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