Why Did My Credit Score Drop?
Seeing a sudden drop in your credit score can be a frustrating experience, especially if you can't readily identify the reason for the change.
Understanding the different factors that go into calculating your credit score, however, can give you some insight into why your credit score is going down and also the steps you can take to address it.
Why Did My Credit Score Drop? 9 Potential Reasons
There are a variety of reasons why your credit score can go down, even if nothing has changed – at least nothing that you're aware of. Here are some of the possible causes for a credit score to drop:
You missed a payment
Your payment history is the most influential factor in your FICO score, so one missed payment can cause a significant drop.
Lenders report late payments 30 days after the due date, and a missed payment can damage your score even more once it's past due by 60 and 90 days. It's important to get caught up as soon as you can if you miss one.
What to do: Contact your lender and explain the circumstances. Sometimes, the lender will make an exception and remove the late payment and potentially even waive the late fee. If not, the late payment will remain on your credit reports for up to seven years.
"If the changes to your report are accurate, you should develop a plan to pay off your debt and work with your financial institution to prevent any further drop to your score," says Carlos Medina, senior vice president at One Technologies, which provides the consumer credit information platform ScoreSense.
Your credit utilization rate has gone up
Your credit utilization rate is the percentage of the available credit on your credit cards that you're using at a given time. The higher the rate, the worse it is for your credit score.
FICO doesn't list a threshold at which your utilization rate starts hurting your credit score, so the lower it is, the better. Experts agree you should aim to keep your credit utilization rate below 30%.
There are a few reasons why your utilization rate may have gone up:
- You've increased the balance on one or more credit cards.
- You've closed a credit card account.
- A card issuer has reduced your credit limit.
What to do: Prioritize paying down your credit card balances. If you pay off your balance in full every month, consider making multiple payments a month or making a payment right before the monthly statement date. Also, avoid closing old credit card accounts unless there's an annual fee or a security deposit or you're having trouble with overspending.
You've recently applied for credit
Virtually every time you apply for credit, the lender performs a hard inquiry on one or more of your credit reports. Each new hard inquiry knocks fewer than five points off your credit score, according to FICO.
But if you've applied for multiple credit cards in a short period, it could have a compounding effect. FICO recognizes when you're rate-shopping mortgage, auto and student loans, so you generally don't have to worry about those.
Additionally, opening new credit accounts can lower the average age of all of your accounts, which can also ding your credit score.
What to do: Try to avoid applying for multiple credit cards in a short period. If you're rate-shopping a loan, do it within a 45-day period, and FICO will combine all of the hard inquiries into one for scoring purposes.
You've co-signed a loan or you're an authorized user
When you co-sign a loan or get added as an authorized user on someone else's credit card, those accounts will show up on your credit report.
Unfortunately, this means that any negative marks associated with those accounts will impact you, even if you're not the primary borrower and aren't responsible for payments.
What to do: "Co-signing a loan means effectively that you own that loan as much as they do," says Jay Zigmont, a certified financial planner and founder of Live, Learn, Plan, a Mississippi-based financial planning firm. "If the person you co-sign with does not pay the bill, you are responsible."
Alternatively, you can try to convince that person to refinance the debt without you to prevent future damage. If you're an authorized user, you can request to be removed from the account, and it will no longer show up on your credit reports.
You've paid off a loan
Paying off debt is always a good thing. But when you eliminate a credit account from your credit reports, it can temporarily cause your score to dip. This could be because your mix of accounts is less diverse now.
"Maintaining a healthy mix of different types of credit, revolving and installment, is considered a positive signal to the major credit scoring models," says Medina.
The good news is that your score will generally recover if this is the only reason for the sudden decrease.
What to do: Keep your other accounts active and continue to use credit responsibly.
You've experienced a major credit event
If you've recently filed for bankruptcy or your mortgage lender has foreclosed on your home, it can cause a substantial decrease in your credit score.
Unfortunately, these negative items can take time to recover from, and you may have a hard time getting affordable credit for a while.
What to do: Continue using your other credit accounts responsibly, and consider applying for a secured credit card to add more positive payment history to your credit file.
Cybercriminals are always on the prowl for sensitive information that they can use. If someone has stolen your credit card information, that person can rack up a balance before you have the time to react. And if the thief managed to steal your name and Social Security number, he or she can open a credit account in your name.
In either case, the result can be an unexpected drop in your credit score.
What to do: Review your credit report for unauthorized accounts. If you find fraud, file a police report and an identity theft report with the Federal Trade Commission. Also, contact the credit bureaus – Experian, Equifax and TransUnion – and the creditor directly to report the fraudulent activity. Finally, place fraud alerts on your credit reports and consider freezing your credit.
There's a mistake on your credit report
At times, creditors may report inaccurate information to the credit reporting agencies. If that information is negative, it can damage your credit score until you dispute it and have it removed.
What to do: Review your credit report for inaccuracies and file a dispute with the credit bureaus. Provide any documentation you have to support your claim.
A medical bill has been sent to collections
Medical debt typically doesn't impact your credit score unless it's been sent to a collection agency and gone unresolved. Medical providers may send a bill to collections once it's 30, 60 or 90 days past due.
But federal law states that collection agencies can't report the account to the credit bureaus until after it's gone unpaid for 180 days. If you have a medical bill that has reached the 180-day threshold, that may be the reason for the drop.
What to do: Pay the bill as soon as possible; it'll be removed from your credit report once it's paid in full.
Why Did My Credit Score Drop for No Reason?
Credit scoring models use complex algorithms to calculate your credit score. This means that if there's been a change in your credit score, there's been a change in the information used to determine the score.
So if you're wondering, "Why did my credit score go down if nothing changed?" The chances are that something did.
It's not always something big, though. It could simply be that you've added a single hard inquiry to your credit reports, your credit utilization rate has increased by a few percentage points, or an old account has fallen off your credit report and is no longer providing positive information to help your credit score.
If the decrease in your score is small, it's likely nothing to worry about, and the score may even rebound in the next few months. But if it's a significant drop, check your credit reports to get an idea of why.
Monitor Your Credit Regularly to Avoid Surprises
If you want to avoid the mystery of the question, "Why is my credit score going down?" consider signing up for a credit monitoring service.
There are many of these services available. Some are free, and some require a paid subscription. The paid services typically provide the most information and also often come with identity theft insurance, dark web monitoring and other services.
But for most people, a free service is good enough. Experian, one of the three credit bureaus, offers free access to your Experian credit report and your FICO score powered by that data.
Alternatively, you can use a free service like Credit Karma or Credit Sesame, which offer access to alternative credit scores.
Finally, many credit card companies and banks offer credit monitoring services to their customers at little or no cost, says Zigmont.
Many of these services offer real-time alerts, which give you updates when changes are made to your credit reports. "Seeing changes in real time will allow you to react before things get really bad," says Zigmont. It can also help you understand how your actions impact your credit score.
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