Why Did My Credit Score Drop? Possible Reasons

Editorial Note:

Last Updated: July 30, 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.

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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?”

Roman Zelvenschi

I started a digital marketing agency Romanz Media Group Inc. 12 years ago. Running my own business quickly taught me the importance of cash flow. Making sales was not enough, I had to have money in the bank to pay the vendors, staff and personal bills.

During those early stages of the company I learned how to get creative with debt and to save on interest cost. I paid for everything I could with a credit card to both get more points and to extend the payment date by 25 days (credit card grace period). I then utilized a 0% balance transfer offers to rotate this debt.

I learned a lot during this process and made a lot of mistakes. My key lesson is that the most important part of being financially independent is how much I managed to save, rather than how much I earned. Staying disciplined with savings and tracking spending is not easy and I tried many different methods to stay on track.

FinancialFreedom.Guru is a side project where I and my staff are trying to share the practical knowledge on how to understand finances and to build wealth.

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3 days ago

Also the timing of the drop matters. There is the initial credit pull for pre-approval
The final pull before execution is usually a few days to a week before closing.
Could be a non issue

3 days ago
Reply to  Brian

 I agree. Many times just the fact you’ve had credit pulls for getting the mortgage you’ll see fluctuations.
I agree unless something fundamental has changed there is not likely a meaningful impact here.
Even if so, its such a competitive landscape. Some mortgage broker or online vendor will offer you the slightly lower rate.

3 days ago
Reply to  Michael

 I would know your score and shop rates and loan cost before any scores are pulled.

3 days ago
Reply to  Brian

sure.Good plan A for sure. I’m just saying if there isn’t a real change as we mentioned above. And the mortgage company wants to dock you 1/8% I would walk on that. Find another vendor

3 days ago
Reply to  Michael

Well yeah but that would be in pretty bad faith imo. They should account for that. I’ve bought 3 personal residences, 3 rentals, and multiple refis. That has never come up and I’ve used a few lenders over the years.

5 days ago

Not sure about anything else, but for me, they just care about the score when they first pull and got it! Down the road to closing, didn’t ask for more any inquiries