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.