Seeing your credit score suddenly drop for an unknown reason can certainly give you a scare. There are a number of reasons why your score may have dropped, ranging from small mistakes like a single missed payment to much more serious situations if a stranger has gotten a hold of your financial information. If you’re curious why your credit score has dropped, it could be because of one of the reasons below.
You Have Missed A Payment, Or Paid Late
If you have one or more payments that are 30 days late (or more) your credit score will take a hit. This is one of the most common reasons for falling credit scores. Pay everything by the due date, even if you’re just making the minimum payment. A good way to avoid missed payments is by setting up automatic billing so bills are paid monthly without you ever having to think about it.
Your Credit Card Balances Are Higher
If you’re using more of your available credit than usual, it drives up your credit utilization ratio. If you’ve made any large purchases (or are using your card a lot) it will cause your credit usage to increase, which will cause your score to decrease. The higher your total credit limit, the less impact minor fluctuations in credit utilization will have on your credit score. A good practice to adhere to is not to go over 30% of your credit limit in a given payment period.
You Applied For New Credit
Whenever you apply for new credit products — whether it’s a new credit card, installment loan, personal loan, auto loan, mortgage or home equity line of credit (HELOC) — the lender performs a credit check or hard inquiry. If your credit is established, your score will only drop a few points. The impact will be more significant if you have new credit.
Only apply for new credit after careful deliberation, and try to avoid applying for multiple products around the same time.
You Closed a Credit Card Account
It may seem smart to close a credit card account you aren’t using. Keeping it open seems like it increases the risk of falling into credit card debt, or having the card stolen. But the average age of your credit — or the period of time you’ve had your accounts — is an important factor in weighing your credit score. If you close an account you’ve had open for a long time, it will reduce your average credit age. Only close an account if you think it’s necessary to do so or if you know you have enough credit history where it shouldn’t be a problem.
You Co-signed On a Loan
Simply co-signing a loan won’t hurt your score, but if you co-sign for someone with credit problems (history of late payments, defaulting on loans, etc.,) it can push down your score. Be wary of co-signing with anyone you think might not be able to make the necessary payments on a loan as you’ll be the one who has to foot the bill otherwise.
You Paid Off A Loan
It may seem silly, but when you pay off a loan in full, the lender reports the payoff and the three major credit bureaus — Experian, Equifax and TransUnion — update your account. The paid-off loan could ding your credit because lenders like to see different types of credit on your credit report.
Paying off a loan will lead to a less diverse credit mix. Credit mix is simply having different lines of credit associated with your account. For example, having a credit card, a car loan, a mortgage, and student loans are all unique lines of credit. If you have good standing in terms of on-time payments with all of them, this shows you can handle paying loans no matter the type and provides evidence of you being a good borrower.
All that said, paying off a loan should only give you a temporary ding on your credit score as long as you made on-time payments and your account was in good standing when it was closed.
You Took Out A Student Loan
Student loans show up on your credit report as installment loans. They can be a mixed bag for your credit score. If you make your payments on time, student loan debt shouldn’t harm your credit score significantly. But if your payments are late (or “delinquent“) or your loans go to collections, your credit score will drop. There are two different types of student loans:
- Federal student loans: Delinquency or missed payments aren’t reported until they’re 90 days past due. Interest rates are usually lower than private loans.
- Private student loans: Private lenders can determine their own rules, so if you need to miss a payment — and don’t want it to hurt your credit — you need to contact your servicer immediately.
There is Inaccurate Information On Your Credit Report
It’s important to regularly check your credit reports to make sure things look correct. Free copies are available on the official Annual Credit Report website (annualcreditreport.com). You can also typically get unofficial reports from your credit card company. When viewing your report, look for unfamiliar accounts, payments that are marked late in error and other aspects that don’t sound accurate to you. To correct errors on your credit report, simply contact the relevant bureau and explain what is inaccurate. Be prepared to have evidence to support your claim.
You’re A Victim of Identity Theft or Fraud
Fraudsters can really destroy your credit. If you find that you’re a victim of fraud or identity theft, contact the credit bureaus immediately and tell them to place a fraud alert on your credit report.
You can also contact your credit providers and ask them to put a freeze on your accounts (there are options to do this on your own as well). This makes it so your accounts cannot be used by those who stole your information.
To report a fraud, contact the Federal Trade Commission immediately. Tell them all the information you have and go ahead and contact any other financial institutions that have your information like banks, credit unions, and credit card companies.
Keep in mind that some information (credit inquiries, etc.) can’t be disputed. Many companies offer credit monitoring services (sometimes for a fee.) Utilizing a monitoring service can add an extra layer of protection.
You’ve Experienced a Major Financial Setback, Like Foreclosure or Bankruptcy
If you’re facing either one of these, your credit score has already taken a hit due to the late payments. The events themselves will make the damage worse, potentially causing a credit score drop of more than 150 points.
Foreclosure is when a lender attempts to recover the balance of a loan by selling the asset because the original borrower has stopped making payments, such as for a mortgage. Foreclosure will stay on your credit report for seven years.
Bankruptcy is a legal filing initiated by borrowers who are deeply in debt and looking for relief. The two different types, Chapter 7 and Chapter 13, deal with how borrower debt is repaid. One way is through surrendering your non-exempt property, the other is through a court-mandated repayment plan. How long bankruptcy stays on your credit report depends on the type of bankruptcy filed. Chapter 7 bankruptcy will stay on your report for 10 years from your filing date, while Chapter 13 only appears for seven years.
Did your credit score drop for no apparent reason? To learn more, watch this video:
Why Does Your Credit Score Matter?
Your credit score helps lenders determine your creditworthiness, or, in other words, gives lenders a baseline to judge risk, the likelihood that you’ll make on-time payments on your loan, what interest rates you should qualify for, and more. Lenders usually only want to work with individuals who they know will reliably pay back their loans. To help them know which borrowers fall into this category, credit scores exist.
Borrowers must establish credit to avoid the potential of lenders declining your loan applications because to them, you’re an unknown gamble. That said, credit scores don’t start at zero, so once you’ve built a rapport with things like credit card loans and installment loans, your credit can quickly be in good standing.
The most popular models, FICO score and VantageScore range from 300 to 850.
FICO Credit Scoring Model
FICO ranges from 300 (bad credit) to 850 (excellent credit score). FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of your credit history (15%), new credit (10%) and credit mix (10%).
- Your credit report must have at least one account that’s at least six months old.
- Borrowers also must have one account that’s been reported to the credit bureaus in the past six months.
You need to aim for a FICO score higher than 670 if you’re applying for any type of financing. A FICO Score over 670 is considered a good credit score. For the other ranges:
- Fair credit score: 580-669
- Bad credit score: 300-579
VantageScore Credit Scoring Model
VantageScore requires your credit report to have at least one account with no minimum age requirement. VantageScores were developed together by Experian, Equifax, and TransUnion and are a bit different from FICO with their ranges:
- Excellent: 781-850
- Good: 661-780
- Fair: 601-660
- Poor: 500-600
- Very poor: 300-499
Your goal as a borrower is still to at least be the good range in order to apply for any type of financing. VantageScores are calculated by payment history (40%), age and type of credit (21%), percentage of credit limit used (20%), total balances (11%), recent credit behavior (8%), available credit (3%).
How to Get Free Credit Scores
You can get your credit score for free on the official Annual Credit Report website. You can also get unofficial versions that are still accurate from your credit card provider as well as sites like Credit Karma.
Credit Tips and Tricks
If you know you need a loan, these tricks can sometimes help you qualify for a better interest rate:
- Applying for a car loan, mortgage or even a new credit card? Do it right before you pay off a different loan and that older loan disappears from your credit report.
- If you need to make a large purchase, consider a personal loan (or in-store financing, which can come with a low introductory interest rate) instead of a credit card, which comes with the temptation to run up a balance.
- Request a credit limit increase. If you’ve made your payments on time and have a good history with the lender, they might be willing to raise your credit limit, which in turn will lower your credit utilization rate.
The Bottom Line
There can be a number of reasons why your credit score dropped, ranging from one time mistakes to much more serious problems. Check your report to see if any of the above reasons ring true for you. And remember to adhere to good monetary practices to maintain a healthy credit score.
There is no need to hire a credit repair company. Anything you can do to improve your credit you can do yourself for free.
It’s highly unlikely your score dropped for no reason at all. One of, or a combination of the reasons listed above could’ve happened to you and resulted in a credit decrease.
A hard inquiry is when you give permission to a lender to check your credit report before they approve a loan. These can affect your credit score. Soft inquiries are checks on your credit that aren’t connected to a specific loan, such as if you check your own credit. These will not harm your credit score.