Why Your Credit Score Dropped: 5 Possible Reasons

Seeing your credit score suddenly drop can be an unpleasant surprise and quite stressful. In such cases, it’s crucial to determine what caused it and take the right steps to boost it back up. 

If you are unsure how to do that, read on: This article was written to help you identify the cause of your credit score drop and advise you on the steps you can take to repair the damage.

What Happened to Your Credit Score?

First of all, this is a very common issue, which means that many people find themselves in the exact same situation as you yourself every day. A credit score drop can be attributed to numerous reasons. Here are some of the most frequent ones:

You Missed a Payment

According to FICO®, the company whose FICO® Score is one of the most widely used credit scoring models, payment history is the number one factor that can affect your credit score. Any late or missed payments can have a massive impact on your overall credit score. 

If you are eager to know the fastest way to raise your credit score, we advise you to start by paying all your bills on time, as this is a key factor in credit scoring models.

If you are just a few days late on a payment, you don’t have to worry about your credit report, but if it’s been more than 30 days, credit issuers will report that to a credit bureau, which will probably make your score drop.

If you find yourself 60 or even 90 days past due, your debt can go into the collection agency’s database and stay in your credit file for seven years.

If you keep asking yourself what makes your credit score go down and you feel like you can’t manage your payments on your own, perhaps it’s time you start looking for a credit monitoring service.

You Cosigned a Loan

A friend of yours has a low credit score, so you’ve decided to help him out by cosigning his loan or a credit card application. If everything goes smoothly, this will not affect your credit score. However, if the person you helped out keeps on being late with their payments, that can influence your credit.

If you find yourself in a situation like this, we would advise you to first talk to your friend and let them know that what they do affects your credit score and then try to sort it out together.

You Became a Victim of Identity Theft

This is probably the last thing that would cross your mind, but it happens occasionally. Therefore, you should be careful, and you should make sure to check your credit reports now and then. Nevertheless, if this happens to you, don’t panic: There are steps you can take to recover yourself from identity theft. 

In case you have seen your credit score drop every month, you might want to investigate that further. If you come across any illegal activity, alert your credit card issuer, consider a credit freeze, and file a report with the Federal Trade Commission, the government body dealing with identity thefts.

Since it’s better to be safe than sorry, consider checking into some of the identity theft protection services or get a secured credit card designed for credit-building.

You Closed a Credit Card

You might think that closing a card you no longer use is always a good decision, but that’s not how things work with credit scores. Believe it or not, your credit score can drop after paying off a credit card. 

Once you close a credit card account, that credit limit gets removed from your utilization ratio - the portion of your credit limits you are using at the moment - potentially lowering your overall score.

Closing one of your older cards can also affect you, as the age of your credit is one of the main parameters in credit score calculation. So before you decide to cancel a particular card, make sure that you’ll have some benefit from it, and it won’t hurt your credit.

You Applied for a New Credit Card

Applying for a new card usually means that you are doing well, and it’s a great step if you wish to build a credit score. Even so, when you apply for a new credit card, the card issuer pulls your credit report to check your background and credit history.

This check is sometimes called a “hard pull” or a “hard inquiry,” and it can lower your score by a few points. The hard inquiries will remain on your report for two years, but most lenders only check the past twelve months when calculating your credit score.

What Is a Good Credit Score?

You don’t have to start biting your nails if your credit score drops by a few points. The important thing is whether it remains a good credit score after the drop.

The credit score is one of the deciding factors lenders consider when applying for a loan. They use credit scores to determine if you are reliable enough to be granted a loan. Furthermore, it helps them calculate the loan amounts and interest rates. So the total amount you’ll end up paying for your loan will be affected by your complete credit history.

In general, the credit score range goes from 300 to 850. The average credit score can vary, but it’s usually between 650 and 750. A score above 670 is considered a good credit score, while any score of 720 or more will put you in an excellent position.

Here’s a breakdown of elements influencing a FICO score:

• Payment history – 35% of your overall score
• Usage of your credit limits – 30%
• Age of your credit – 15%; the longer age will give you better terms
• Recent application for new credit – 10%; these hard inquiries can get you a few negative points
• Different types of credits – 10%; if you have both a mortgage loan and a revolving credit, your score is more likely to go up.

How To Make Your Credit Score Go Up

Financial institutions consider a score below 549 points a bad credit score. In practice, people with scores like this will get rejected every time they apply for a loan.

Anything from 550 to 619 will get you to the poor credit score list. This might get you qualified for credit; however, since you represent a high credit risk, the lender is likely to give you very unfavorable terms. If you still decide to go with this option, be sure to check out the credit cards for a low credit score.

If you recognize yourself in one of these two groups, here are some steps that can help you improve your current position:

Pay your bills on time.

The tried and true way of earning extra points. We’ve already mentioned that credit history is the most important factor lenders consider when deciding whether or not to give you credit. As the late payments will leave a mark on your credit report for seven long years, try to manage your payments in a timely manner.

Make frequent payments.

If you can make a few smaller deposits throughout the month, you can slightly improve your credit situation. The goal is to lower your credit utilization ratio so that your credit score can go up.

Increase your credit limit.

If you raise your credit limit, your credit utilization ratio will decrease, which can help you boost your credit. If you have an upward-trending score, you might consider this a quick way to rank your credit better. 

On the other hand, if you tend to overspend, increasing your credit limit might not be such a good idea. You should instead pay down your credit card balances.

Dispute any credit report mistakes.

If you have already checked all of the possible options and you still don’t see what has caused your credit score to drop, there can be an actual error in your report that needs to be fixed. The good news is that you can access some free credit reports from one of the three major credit bureaus: Experian, Equifax, and TransUnion.

If you notice a specific mistake, you can dispute it and remove it from the report. Once you submit your requests to the credit bureaus, you can expect a response within 30 days. 

However, if you find that your credit score dropped after you filed a dispute, you probably submitted information with an adverse impact, for example a lower total credit limit than previously registered or a higher credit utilization rate stemming from a higher credit card debt than previously reported.

Image Credit: Author Marco Verch, under Creative Commons 2.0 license.