Why Did My Credit Score Drop?

Credit scores have a big impact on your finances. Yet credit scores are also a mystery to many people, especially when your credit score drops when you seemingly haven’t had any credit problems since the last time you checked.

This article will explain several reasons why your credit score might drop. Then it will discuss what you should do when that happens. Topics covered include: 

• Why did my credit score drop if nothing changed?

• 10 reasons your credit score dropped

Why did my credit score drop if nothing changed?

Credit scores are based on five things:

1. 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. 

2. Credit usage. Credit-utilization rate is the percentage of your available credit that you’re currently using. If your balances represent a high percentage of your total credit limit, that may drag down your credit score. 

3. Length of credit history. This includes the average age of all your credit accounts, and the ages of your oldest and newest accounts. Anything that affects those things can change your credit score.  

4. Types of accounts. This is what’s known as credit mix. Having a mix of loans and credit-card accounts is considered a good thing.

5. Recent activity. If you’ve opened or even just applied for a lot of credit recently, it can be a red flag that lowers your credit score. 

For each of those five factors, there are several events that can affect them. In fact, it’s almost more surprising when your credit score doesn’t change than when it does. So, you might think that nothing about your financial situation has changed, but from day to day, several things might be moving your credit score up or down. 

Even though frequent changes in credit scores are normal, most should be fairly small. Still, when your credit score drops, it’s important to understand why. This is especially true if you see a significant change — say, by 10 to 20 points or more.

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Reason 1: You missed a payment date

Even if you’ve tried to keep up with your payments, some billing cycles can be tight. By the time you get around to the bill and send a payment, you may have missed the deadline. 

Making payments electronically is not only faster, but has the advantage of allowing you to immediately confirm receipt. However, when you make electronic or automatic payments, be sure there’s enough money in your 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. 

Where this can hurt credit scores is by affecting the length of your credit history. When you pay off a loan, that account drops off your credit report. This could lower the average length of your credit accounts. Paying off a loan has an especially big impact if the loan was your oldest credit account.

Reason 3: You closed a credit account

Sometimes, closing a credit card account is a responsible thing to do. So why can it hurt your credit score? As with paying off a loan, closing a credit card account can reduce the average age of your credit accounts. That could ding your credit score.

Also, closing a credit card account reduces the amount of credit you have available. Any balance you have would now represent a higher percentage of your available credit. That counts as higher credit utilization, which lowers your credit score. 

Reason 4: You opened a new credit account

Opening a new credit account might hurt two aspects of your credit score. Taking on new credit counts as a negative for your score. New credit also would hurt your length of credit, by reducing both the average age of your accounts and the age of your newest account.

Reason 5: You applied for new credit

Even if you haven’t opened a new account yet, just applying for credit can hurt your credit score. The resulting credit inquiries have a mildly negative impact on your credit score; but if you’ve applied for more than one account, doing so could add up to something more serious.

Reason 6: You were removed as an authorized user on an account

If someone lets you be an authorized user of their credit-card account, 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 7: Your credit limit was lowered

Credit card companies control risk by limiting how much credit their customers can access. If they are concerned about credit conditions, they may reduce the credit limit of some customers. This can happen even if you’ve never had a problem making your payments on time. 

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 8: Your credit-card balance increased

Even if you’ve been keeping up with your minimum monthly payments, your balance would increase if you’ve been charging more than you’ve been paying. An increased balance would raise your credit-utilization rate and damage your credit score.

Reason 9: There’s a mistake on your credit report

Credit reports include a large amount of transaction and account data. New information may be coming in every day. It’s no surprise that every now and then a mistake happens. For example, an erroneous balance, accidentally adding or omitting an account, or incorrectly recording a payment could all hurt your credit score.

Reason 10: Someone else used your card

Your credit score could drop without you doing anything if someone else is using your card. 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. It could also indicate that someone has opened a bogus account in your name.

Financial fraud is all too common. Changes in your credit score can be the first warning sign that you’re being victimized. You can also sign up for credit monitoring that may alert you to activity that will affect your credit score. 

Steps to take if your credit score drops

If your credit score drops, the most important step you should take is to check your credit report. There are three major credit reporting bureaus: Equifax, Experian, and TransUnion. All three collect similar information, but your credit record can differ from one credit bureau to another. 

You are allowed one free credit report per year from each of 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 the checklist from earlier in this article showing reasons your credit score may have dropped. Once you’ve identified the reason, you’ll be able to see what steps you should take to fix your credit.