Why Did My Credit Score Drop?

Credit scores have a big impact on your finances, and your credit score might often change behind the scenes based on fluctuations in your spending and borrowing. Understanding why credit scores drop or rise could help you save money on loan interest, qualify for better financial products, and improve your financial life for the long run. 

Every American should monitor their credit score. Just like you want to know how much money is in your bank account, it’s good to know your credit score and keep track of any changes. Credit score monitoring isn’t just for people who need debt relief or who are trying to pay off debt. It’s a key part of your overall financial health. 

Freedom Debt Relief isn't a Credit Repair Organization and doesn't provide, or offer, services or advice to repair, modify, or improve your credit.

How to Find Out if Your Credit Score Drops

Credit monitoring apps make it easy to keep track of your credit score. Some credit card issuers and banks also let you check your credit score for free when you’re logged into your account online. That makes it easier to watch for any changes from month to month. 

If you’re monitoring your credit score, there are many moments when your credit score might go down—even without any unpaid bills or negative credit items. You might wonder, if my bills are paid on time, why did my credit score drop?

First of all, don’t worry. Your credit score could drop for many reasons, and most of them aren’t a sign of financial trouble. But if you’re getting ready to apply for a loan, such as a debt consolidation loan, you’ll want your credit score to be as high as possible. It’s good to understand why your credit score might drop. 

If you’re rebuilding your credit history after going through debt collections or a debt settlement program, you might want to feel more in control of your credit score. Understanding the ups and downs of credit scores can help you stay motivated while you rebuild your credit. 

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Why Did My Credit Score Drop If Nothing Changed?

Even if your credit card debt is under control, you’re on top of payments, and you haven’t applied for any new loans, credit scores can still fluctuate. Every month, behind the scenes of the financial system, your creditors submit data about your borrowing and spending. 

This data goes to the three credit bureaus, also called credit reporting companies. They are Experian, TransUnion, and Equifax. Even if you feel like nothing has changed in your personal finances, your credit score could still change.

In any given month, you might borrow slightly more money than last month. Or you might pay off a loan. Or you might apply for a new account. Credit scores are constantly being recalculated based on your experience with credit accounts. Your credit score doesn’t always change from month to month. But if your credit score drops, these are the factors to look for. 

Payment history 

This is the most important part of a credit score. Making payments on time is the best way to build good credit. When you’re late with payments, it hurts your credit score. 

Making even one payment 30 days late could knock a noticeable number of points off your score. If you let that account go to 60 or 90 days late (or worse), expect your score to nosedive.

Amounts owed

Credit utilization rate is your credit card balances compared to your credit limits. If your balances are high, that’s almost sure to drag down your credit score. 

For example, let’s say you have a credit card with a $5,000 credit limit and a zero balance. Your utilization is zero. 

One day you go out and charge $4,000 worth of electronics. Your credit utilization rate is now 80% and your score is likely to drop. 

Over the next four months, you pay off your balance. Each month it’s lower than the month before. That is likely to have a positive effect on your credit.  

Length of credit history

Length of credit history means how long you’ve been using credit. People with a long credit history have a proven track record of paying on time and not getting overextended on loans. Credit reporting companies like to see stable, long-term usage of credit. 

Having a credit account that’s been open for a long time, such as a mortgage that you’ve been paying off for 10 years, could boost your credit score. Opening new accounts brings your average account age down.  

Credit reporting companies also look at the ages of your oldest and newest credit accounts. 

Types of accounts 

This is what’s known as credit mix. Having experience with different kinds of credit accounts is considered a good thing. 

For example, a student loan, a car loan, and a credit card.

Inquiries

Every time you apply for credit, you could lose a few points off your credit score. If you’re trying to rebuild credit, every point matters. 

Here are some of the most common reasons a credit score might fall.

Reason 1: You Missed a Payment Date

Late payments can put a big dent in your credit score. Try to avoid paying late, even if you can only afford the minimum, such as $40 on a credit card. If you’re struggling with a loss of income or other financial stress, it might be tempting to skip a payment on your credit card or other loans. 

Some people might miss a payment because of miscommunication from the creditor or slow-arriving mail. Billing cycles can be tight. By the time you get around to opening the bill and sending a payment, you may have missed the deadline. 

Two quick ways to avoid missing payments are: 

• Sign up for electronic statements and online payments 

• Use automatic payments (at least for the minimum) so your bills get paid on time without any extra effort

Making payments electronically is faster and also has the advantage of allowing you to immediately confirm receipt. When you make electronic or automatic payments, be sure there’s enough money in your bank account to cover the payment. 

Reason 2: You Paid Off a Loan

This is one of the most surprising reasons why a credit score may drop. You’d think paying off a loan would improve your credit. After all, you now owe less money, and you’ve proven that you pay your debts. 

Paying off a loan could make your credit score drop if it was your only installment loan. You get points for credit mix – having and using a variety of different kinds of credit accounts. If you close an installment loan account (even by paying it off), it no longer factors into your credit mix. If that was your only installment loan account, then you could lose points. 

This doesn’t mean you should stop paying off your loans. But be prepared for a slight decrease in your credit score if you don’t have similar accounts on your credit report. 

Reason 3: You Closed a Credit Account

Sometimes, closing a credit card account is the responsible thing to do. So why can it hurt your credit score? 

Closing a credit card account could affect your credit score in two ways. Credit mix and your utilization ratio.

As with paying off a loan, if you close your only credit card, you might lose points on your credit mix.

Second, if you close a credit card account while you still have a balance on that card or any card, your utilization rate will go up. Higher utilization usually hurts your credit scores. As it goes up, you could lose points. As you pay down your balances, your score could rise. 

Reason 4: You Opened a New Credit Account

Opening a new credit account might hurt two aspects of your credit score. 

Every time you apply for credit, you could lose a few points.

New credit also would hurt your length of credit, by reducing both the average age of your accounts as well as adding a brand-new account.

Reason 5: You Were Removed as an Authorized User on an Account

If someone adds you as an authorized user to their credit card, that account is included in your credit record. Having your name taken off an account acts much the same as closing an account. It could increase your credit utilization rate by reducing the amount of credit you have available. It could also reduce the average age of your credit accounts.

Reason 6: Your Credit Limit Was Lowered

Credit card companies sometimes reduce credit limits. Your credit limit could be $2,000 today and $1,500 tomorrow. This could happen even if you’ve never had a problem making your payments on time. 

Having your credit limit lowered doesn’t always mean you did something wrong with your credit account. Sometimes the credit card company isn’t singling you out for being a risky borrower. They may just be reducing the total amount of credit that's being offered to its customers. 

If you have any balance on your credit cards, lowering your credit limit will increase your credit utilization rate. That’s one of the things that can hurt your credit score.

Reason 7: Your Credit Card Balance Increased

If your credit card balance goes up, your credit score might go down. 

Reason 8: There’s a Mistake on Your Credit Report

Every now and then, credit reporting companies make mistakes. For example, your credit report might have an account that doesn’t belong to you, an incorrect balance, or incorrectly recorded payment amounts. 

If your credit score drops suddenly for reasons you don’t understand, be sure to check your credit report. You can get a free credit report from all three credit bureaus once a week at AnnualCreditReport.com. 

Checking your credit report for mistakes is an important financial chore, even if your credit score is fine. Try to make time for it once or twice a year. 

Reason 9: Someone Else Used Your Card

If someone else is using your card, your credit score could drop without you doing anything. (Again, utilization.) 

This may be perfectly innocent if there’s another authorized user on your card. However, it could also be a sign that someone has stolen your account information and is charging things to your credit card. 

Financial fraud and identity theft are becoming all too common. Changes in your credit score can be the first warning sign that you’re a victim of fraud. You can sign up for credit monitoring that may alert you to fraud and other activity that affects your credit score. 

The credit bureaus will help you if you think someone is fraudulently trying to access your credit report and identity. Just contact any one of the three credit bureaus. It will contact the other two for you. Putting a fraud alert on your account means that a lender or creditor must take reasonable steps to confirm your identity if anyone (including you) tries to open an account in your name or make changes to an existing account. 

Steps to Take if Your Credit Score Drops

If your credit score drops, the first thing you should do is check your credit report. Make sure to check with all three major credit reporting bureaus: Equifax, Experian, and TransUnion. All three collect similar information, but your credit record can be slightly different  from one credit bureau to another. You’re allowed a free credit report each week from the three credit bureaus. Be sure to check your credit report from all three to try to identify why your credit score dropped. 

When you look at your credit reports, go through our list of reasons your credit score may have dropped. Once you’ve identified the reason, it’s easier to figure out what steps you should take to fix your credit.

A credit score drop is sometimes a sign of bigger financial problems ahead. If your credit score drops because you're struggling to pay your bills and falling behind on credit card debts, you might need credit card counseling or other serious help. 

But for most people, credit scores go up and down for lots of small reasons. If you’re wondering why your credit score dropped, the reason is often simple.