Why Did My Credit Score Just Drop? 6 Common Reasons
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Credit scores function as a snapshot of your credit history that helps lenders and landlords decide how much risk you pose as a borrower or renter. The better your credit score, the lower the risk you present since it means you have a proven history of paying back your debts on time and in full.
Credit scores, however, can also change quickly and, sometimes, not for any obvious reason. If your score has plummeted seemingly out of the blue, read on to find out some possible reasons why.
Six common reasons your credit score may have dropped
Here are the six most common problems that can lower your credit score.
1. Late or missed payments
Payment history is one of the most influential factors in your credit history, accounting for up to 35% of your FICO score.
Because of this, if you don’t make at least the minimum payment after 30 days, it can seriously damage your credit score: According to FICO, a person who has otherwise never missed a payment could lose around 100 points after missing a payment for over 30 days and another 50 points or so after 90 days.
That’s why it’s important to pay at least the minimum required amount each month. If you cannot, it’s essential that you contact your lender and discuss payment options. Federal and many private student loan lenders, for example, offer a variety of options when you can’t afford payments. Credit card issuers might also be willing to discuss a lower minimum payment or reach an agreement.
2. High credit card balances
Your credit utilization rate — which accounts for anywhere between 20% and 30% of your credit score — refers to the ratio between how much credit you use versus how much you have available.
Most experts (and lenders) recommend keeping your credit utilization ratio below 30%. So, you might have an excellent track record of making payments on time, but if you've recently maxed out a credit card or two, your score is still going to suffer.
If that’s the issue, start paying down your credit card debt by making much more than the minimum payment. This will increase your available credit and help your score recover.
3. A new credit account
You might have seen a slight drop in your credit score if you’ve recently applied for any new credit account, whether it’s a loan, line of credit or credit card. The amount your score actually drops will depend on several factors, including your overall credit history, but it’s one of the most common reasons scores can go down .
Why would new credit hurt your score? Because creditors tend to see multiple hard inquiries as a sign of risk, especially if you have high overall debt.
The good news is that if your credit score has dipped after being approved for a new loan, it will likely rebound or even grow as you build a longer credit history with on-time payments.
4. Erroneous information
Credit report errors are, unfortunately, quite frequent. In fact, according to an FTC study, around one in five people have mistakes in at least one of their credit reports.
Make sure to request your credit reports frequently — you can get reports from all three bureaus through annualcreditreport.com — and examine them carefully.
Look out for accounts that don’t belong to you, incorrect names or negative marks that are older than seven years. If you find such information, you can dispute it directly with the credit bureaus. Alternatively, you can hire a credit repair company to do it for you.
5. Looking at a different credit score than usual
Not all credit score providers offer the same type of score. If it seems your credit score appears to have taken a hit, you’ll want to make sure that you’re looking at the same score as usual.
The two major consumer credit scoring companies are FICO and VantageScore. Many of the websites that provide free credit scores usually offer the VantageScore. However, most lending institutions use FICO scoring models (plural, as FICO has several different models and versions).
Having said that, these two scoring models are very alike in many ways and so your scores shouldn’t be significantly different.
For one, they both use the same 300 to 850 scale and consider similar factors to calculate the scores, including payment history, credit age and credit utilization, among others. Where they differ is in how much weight they place on each of those factors — for example, payment history is 35% of the FICO score, but it’s 40% of your VantageScore.
6. You’ve been a victim of fraud
If none of the above applies, but your score has dropped significantly, then you may want to take a careful look at your credit reports from all three credit bureaus — Experian, TransUnion and Equifax — for suspicious activity. If you find loans you didn’t apply for and credit cards you don’t recognize, you should consider these major red flags signaling possible identity theft.
If you’re a victim of identity theft, you will be able to dispute and remove the activity that’s hurting your score from your credit report. But disputing the information is still a labor-intensive process, and so it’s much better to catch suspicious activity before it causes significant damage to your credit score.
Enrolling in a credit monitoring service like those offered by Experian and Credit Karma can help you catch fraud as soon as it happens. Another option is looking into a paid identity protection service for proactive monitoring of your information online.