Last Updated: January 11, 2023
Even for those who believe they understand the way credit score works, a sharp drop may come as quite a surprise. This often leaves you with a question – why did my credit score drop? The problem is that multiple factors affect your credit score, and not all of them are intuitive. Here are some tips to help you out here.
What Is a Credit Score?
To understand why your credit score went down, you must first understand the nature of credit rating. Simply put, this is a number (usually between 300 and 850) that determines your fiscal trustworthiness. It’s an estimation based on extensive analysis, and it’s supposed to provide the potential lender, employer, or even partner with your creditworthiness degree.
How Are Credit Scores Calculated?
To those who don’t understand the estimation structure, it will often seem that their credit score dropped for no reason. Yet, things are never that simple.
First of all, there are several different scales and types of credit rating. It’s commonly considered that the FICO score is the most objective and reliable, but this is not the only scale available. A common alternative to the FICO score is the VantageScore. It’s worth mentioning that the VantageScore (and its derivatives) aren’t used as widely as the FICO.
When dealing with a sudden drop in credit score, the next thing to understand is the credit report structure. In the case of the FICO score, there are five factors, each contributing to the total score result.
- The first item on the list is your credit history. This is determined by your responsible fiscal behavior in the past (whether you’ve paid all your bills in time). The credit history amounts to 35% of your total credit score.
- The second item is the total amounts owed. The higher your debt, the worse your income-to-debt ratio gets. This is a crucial factor for most creditors, and it makes 30% of your FICO score.
- The third factor is the length of your credit history. This determines about 15% of your FICO score and explains why you may experience a credit score drop after canceling a credit card.
- The fourth factor determining your FICO score is your credit mix. This represents all types of credit accounts you have — credit cards, retail accounts, installment loans, and more. The credit mix accounts for 10% of your FICO score.
- The fifth and final factor is new credit. This is the total number of new loans, credit cards, and lines of credit that you’ve recently applied for. It determines the remaining 10% of your FICO score.
The lack of understanding of these fundamentals might be why in 2019, as many as 16% of Americans had a very poor credit score.
Why Did My Credit Score Drop?
If you believe your credit score dropped for no reason, you need to reexamine whether any of the following is true:
You were late with your payments in the past seven years
As we mentioned above, credit history is by far the biggest factor, and being late with your payments can seriously lower your credit score. Payments missed by 30 days are being reported to credit bureaus. Bear in mind that late payments can stay on your credit report for up to seven years from the original due date.
You’ve recently made an expensive purchase
Your credit card statement’s balance relative to the account’s credit limit represents your credit utilization ratio. This calculation can be affected by credit card transactions. So, if you make a big purchase just before the last day of the billing cycle, this could result in a credit score drop. Such a decrease, though, is the easiest to manage and recover from.
If you plan to apply for a loan soon, It’s essential to keep your credit card balance high. For 22% of all Americans, the average credit card balance is $100-$500.
Your unpaid account was sent to a collection agency
If you neglect your account for long enough, it will eventually be sent to a collection agency. This might have a devastating effect on your credit score. Note, this includes all your bills, not just your loans and credit card accounts. So, a missed utility or a monthly phone bill can be just as bad.
New credit application
Every time you apply for new credit, your credit rating will decrease slightly. But this decline is relatively easy to recover from. Applying for too many different loans and credit cards at the same time can, however, result in a more severe credit score decrease.
Your credit card was recently closed
Canceling a credit card can directly impact your credit history. No matter if it’s you or the issuer who closed the account. The exact bearing on your creditworthiness depends on the card’s balance, credit availability, and credit history length.
You are a victim of identity theft
The problem of identity theft is a serious one because it involves a malicious third-party potentially exploiting your credit in your own name. The issue can grow disproportionately if you don’t prevent or notice this in time. This is why adequate identity theft protection is so important in preventing unauthorized credit usage.
You’ve had a hard credit score inquiry performed
When applying for a loan or a new credit card, the lender or issuer will most likely run a hard credit score inquiry as part of the approval process. This will lower your credit score by approximately five points. While the impact isn’t that significant, if you have a short credit history, a few accounts, or have had multiple inquiries performed over a short period of time, it could also be an answer to the question of – why did my credit score drop?
There was a clerical error
Finally, you shouldn’t dismiss the chance of your credit score dropping due to a clerical error. Fortunately, you can dispute errors on your credit report. So, if you didn’t miss any payments, make significant purchases, or initiate hard inquiries, yet your credit score randomly dropped, you should consider the likelihood of a clerical error.
How Do I Get My Credit Score Up?
Now that you know why your credit score dropped, you need to focus on fixing it. Here’s a recommended course of action:
Pay your bills on time
The first thing you should do is to start paying all your bills on time. You can make a detailed schedule and ensure that every single account payable is on the list. Include the due dates and add them to the calendar. Also, explore your autopay options and set up reminders. This is the best way to minimize negative credit score fluctuations in the future.
One trick you can use to maximize your credit effectiveness is to make micropayments over the course of months. This way, you can manage your credit card balances much easier and keep the utilization ratio low. It’s quite an effort-intensive method, but it really shouldn’t be so hard with automated and mobile payments enabled.
Dispute negative items on your credit report
We’ve already mentioned that one of the potential reasons your FICO score decreased could be a clerical error. If you suspect this to be the case, make sure to inspect and then dispute all negative items on your credit report.
Look for professional help
Nowadays, it’s relatively easy to find companies that specialize in credit repair. Naturally, the last thing that a person with a bad credit record needs is another expense. Still, professional support in the form of adequate methods and tools will give you the quickest results.
Don’t close your old credit cards
Closing a credit card means shortening your credit history and lowering your borrowing limit — both of these affect your credit score. So, keep your oldest cards open and even use them occasionally (in order to avoid a scenario where they are closed by the issuer). This way, you can eliminate one of the reasons your credit score goes down.
Look for higher credit limits
Now, this is a tricky method, considering how it may initially lower your credit score if your card issuer performs a hard inquiry before increasing your limit. Still, with a higher limit, you have a chance of repairing your credit score more quickly – if you control your spending. This is due to the fact that a higher credit limit affects your credit utilization ratio.
How Do I Get My Credit Score?
The first way to check your credit score is by inspecting your credit card statement. Some major credit card companies offer this report on a monthly basis, but you can also view it by logging into your online account. This is probably the easiest and most commonly-used way to see if your credit score keeps dropping.
Another way to check your credit rating is to use credit score services. Just make sure to read the fine print. Some of these companies advertise their assistance as free but only offer a free trial after which they proceed with a monthly subscription (with a fee that gets charged automatically).
Then again, those who believe that their credit score dropped for no reason may decide to buy their credit score directly from the company. Because this is the most direct form of inquiry, it’s also the most reliable of your options. This purchase sometimes goes together with products like credit protection or identity theft monitoring. These, nonetheless, are not mandatory.
You should also know that you’re entitled to one absolutely free credit report every 12 months from each of the three nationwide credit reporting agencies — Equifax, Experian, and TransUnion. This is an advantage that you should use in order to get a more accurate estimate of your financial standing.
In the end, for all who wonder, “why did my credit score drop,” the answer may be simpler than you expect. Being negligent with your monthly payments, spending big, closing old credit cards, and applying for new loans and credit cards are the most likely reasons. Understanding the factors that determine your credit score is the necessary first step in improving it.
Opening a new credit card will drop your credit score for a couple of reasons. First, the credit card issuer will conduct a hard credit inquiry. Second, it increases the new credit factor (which is about 10% of your entire credit score). But generally speaking, when you get a new credit card you should see your credit score going down by not more than 1%-2%.
The general rule is that hard credit card checks stay on your credit report for two years. On the other hand, FICO scores consider only inquiries that took place in the last 12 months.
You will lose approximately five points (often even less) per hard pull. On its own, this isn’t problematic, but several hard inquiries may make a difference.
No, requesting a copy of your credit report has no effect on your credit score. The regular credit card issuer reports also don’t cost you any credit score points. When making an inquiry for new credit, though, the lender may run a hard credit check which brings your credit score down.
Closed accounts will stay on your credit report for 10 years. This, nonetheless, is only true for good accounts with a history of on-time payments. Accounts with adverse information will stay on the credit report for up to seven years.
Missed or late payments will remain on your credit report for up to seven years even if you pay the past-due. But if you suspect a clerical error, you can try to dispute it with credit bureaus.
Closing a credit card may shorten your credit history length and lower your credit limit. This means that there is a chance it will lower your credit score. If it’s a high-limit or a long-standing credit card account, the effect will be even more severe.
Of course, in some cases canceling a credit card is a good idea. If your unused card is relatively new, has a high annual fee or unfavorable terms, closing the account may be better. Also, if you’re struggling to control your spending, one less source funding your unhealthy purchase habits is a safer bet.
The chances are that your installment loan was an account with a low balance, while the rest of your active accounts all had a high balance. This scenario will inevitably lead to a drop in your credit rating. This is the answer for all those wondering: “Why did my credit score drop even though I paid off my debt?”