Why Did My Credit Score Drop? Possible Reasons
Last Updated: May 27, 2020
You know that it’s important to have a good credit score, so you do all the right things. Any mistakes you make are short-lived: you’re always quick to correct them. Despite this, your credit score should be strong, and you have a pretty good estimate of where it should fall. Yet, when you look up your credit score, it’s much lower than expected.
If you find yourself asking “Why did my credit score drop?”, we’re here to help. Sometimes it is difficult to pinpoint exactly why your credit score went down. We’ll suggest several common reasons so that you can identify the issue, correct it, and restore your score.
Why Your Credit Score Dropped
Your credit score is affected by five factors: payment history, new accounts, utilization, types of credit, and age of accounts. Perhaps your actions cause one of the five factors to be negatively affected, and now your score went down.
Missed or Late Payment
At 35% of your credit score, your payment history is the most important factor. The easiest way to ding your credit is to pay late or not pay at all. To correct this, make up the late or missed payment and set up reminders to pay your bill on time. You may also make weekly micropayments that cover your minimum payment. Ideally, the micropayments should cover the total cost of your credit card bill by the due date.
You Bought Something Expensive/Your Utilization Ratio Increased
Utilization counts for 30% of your credit score. Your utilization ratio is the amount of credit you’re using divide by your total available credit. Experts advise that your utilization should fall at 30% or less. Making an expensive purchase on your card increase utilization. Paying down the large balance will resolve the problem.
Closing an Account
You’ve decided to close that credit account you no longer use. This reduced your utilization, and age of your credit history (another factor, worth 15% of your credit score). The best defense is to keep old accounts open to protect your score from falling.
You Applied For New Credit
During the application process, the credit company will perform a hard pull on your credit. This negatively affects 10% of your credit score which is concerned with new accounts. You should only apply for credit when you both need it and can afford it. Aim for cards that you have a good chance of getting approval. Fortunately, the effect of credit inquiries (even hard ones) only lasts for a year. If you’re doing everything else right, your credit should recover in 12 months.
You Have a Derogatory Mark On Your Credit Report
It could be an account was sent to collections, or you missed paying a utility bill. Whether it was a bankruptcy, tax lien, foreclosure, or civil judgment, it all represents that you’ve defaulted on a balance. Protect your credit by monitoring your credit history frequently for derogatory marks.
You’ve Paid Off a Loan
You’ve been waiting for the day that you could make that final car, house, or student loan payment. No one told you it would come with a drop in your credit score. Paying off loans decreases the diversity of your credit mix (worth 10% of your score). A well-balanced credit mix is seen as a good thing by lenders. A credit history with one type of credit, or with many credit accounts either recently opened or closed is concerning. Lenders worry that you cannot manage your credit accounts. We’re not advocating that you hang on to the unnecessary debt. Instead, we suggest you should assess what your accounts will look like after you make the final payment. You should understand how this would affect your score.
There Are Mistakes On Your Credit Report
Sometimes the credit bureau makes an error, or your lender uploads the information wrong. Don’t pay for their mistakes. File a claim with the credit bureau who pulled the report with the error. You may also file a claim with the lender who reported the wrong information. Both parties are obligated to investigate non-frivolous claims and either correct or remove the error. If there are any accounts you don’t recognize, this may be a sign of identity theft. Make sure and file a police report, and a claim with the credit bureaus and the lender.
Improve Your Financial Habits
Most people are only informed that their credit score went down when they’re applying for credit. Unfortunately, that’s when they need it to be as good as possible. The best way to protect yourself is to go on the offensive. Work on improving your financial habits, and monitor your credit score and report regularly. That’s the most reliable way to avoid asking “Why did my credit score drop?”