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By Kenadi Silcox
July 7, 2021
Arcade game showing the scores are dropping.
Chris Gash for Money

Your three-digit credit score can be the difference between being approved for a new financial product with strong terms versus being stuck with sky-high interest rates — or worse, denied altogether. So it can be incredibly frustrating when you think you’re doing well financially, only to find that your score has dropped.

Credit scores function as a snapshot of your credit history that helps lenders — and often landlords — determine how much risk you pose as a borrower or renter. The better your credit score, the lower your interest rates and larger your credit limits will be, while the opposite is true the lower your score is. But credit scores also frequently change, and sometimes not for any obvious reason.

“Scores fluctuate all the time depending on how the information in your credit history is evolving and changing,” says Rod Griffin, senior director of consumer education and advocacy at Experian.

Here are the six most common problems that can lower your credit score, according to Griffin:

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1. You’ve missed payments

The most common reason that peoples’ credit scores have dropped is because they missed a payment, Griffin says.

“If you're unable to pay a debt as agreed, it's going to have a negative effect,” he says.

Missing payments are reported to the major credit bureaus once they’re 30 days overdue, so it won’t impact your credit score if you make the payment a few days late (although you will probably have to pay late fees). But if you don’t make at least the minimum payment after 30 days, it can seriously damage your credit score: According to credit damage data from FICO, a person who has otherwise never missed a payment could lose over 80 points after missing a payment for over 30 days and another 50 points after 90 days.

That’s why it’s important to at least pay the minimum required amount each month when the option is available, even if you can’t afford to pay off your entire balance. While you ultimately will need to pay the full amount in order to avoid having a high credit utilization rate (more on that later), your payment history is often the most important factor in determining your credit score.

You should also always contact your lender if you’re struggling to meet your mortgage, student loans or car payments in order to avoid defaulting. You may be able to reduce your monthly payments or have the loans placed into forbearance, which won’t impact on your credit score.

2. Your credit utilization rate is too high

Your credit utilization rate is the ratio between how much credit you use vs. how much you have available. The standard goal is to keep your credit utilization rate below 30%. You might have an excellent track record of making payments on time and in full, but if you only have one credit card and you’re using 90% of the total amount, your credit score is still going to suffer.

Griffin advises that borrowers in this situation open up another account and split your usage between the two because “if you’re using your credit well and can keep utilization low on both cards, you’ll likely see scores improve over time.”

But keep in mind that this strategy can also backfire if you can’t keep the utilization low on both cards. Then, you’ll likely end up lowering your credit score because you’ve maxed out your cards and are carrying a high balance each month, leading to a high utilization rate. That’s where making just the minimum payments on your cards may not be enough. You’ll need to pay off more than the minimum amount if you want to lower your utilization rate in order to raise your overall score.

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3. You recently took out a new line of credit

You might’ve seen a drop in your credit score if you’ve recently been accepted for any new lines of credit. The amount your score actually drops will depend on how large the loan is and your overall credit history, but it’s one of the most common reasons peoples’ scores go down, according to Griffin.

It may not make sense at first glance: You had a good enough score to secure a low-interest mortgage loan, so why would it suddenly drop down now that you have it? But from a creditor’s perspective, Griffin says that while you may have good credit history, they have no idea whether or not you’ll continue to make the required payments long-term.

The good news is that if your credit score has taken a dip after being approved for a new loan, once you consistently make payments over the next few months, it will likely rebound or even grow as you build a longer credit history.

One piece of common knowledge about building credit is that your score tends to take a hit whenever a “hard” credit check is run on you, usually when applying for a new line of credit or apartment. But according to Griffin, a credit inquiry alone is unlikely to have a major impact on your overall score — maybe 10 points at maximum.

“You might see your scores dip a bit initially, but inquiries are really the least important factor in credit scores and will have the least impact,” he says.

If your credit score does appear to have taken a significant hit after applying for a new line of credit, then you “have far more serious issues causing your scores to drop than that inquiry,” Griffin says.

Consider when the last time you checked your credit score was and your entire credit history before worrying too much about how much one application might affect your score.

4. You recently filed for bankruptcy

It might seem like a no-brainer, but yes, declaring both Chapter 13 and Chapter 7 bankruptcy will absolutely have a direct effect your credit scores.

“Declaring bankruptcy means your scores are going to drop a lot,” Griffin says. That’s because when you file for bankruptcy, you’re essentially telling creditors that you’re a major credit risk in exchange for wiping out debt that you’ll never be able to pay back. If you file for bankruptcy with a good credit score, you could see your credit score drop by more than 200 points.

Getting your credit score back up after filing for bankruptcy will take a lot of time and effort, but after seven years the bankruptcy will be removed from your credit report and you’ll be able to get approved for more credit-building financial products.

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5. You’re looking at a different credit score than usual

The credit score you access through your bank may not be the exact same as another provider, even if you look at them on the same day. If 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; while they both use the same 300 to 850 scale for generating scores, the way those scores are calculated can be different. For example, VantageScore factors in items like your “pattern of behavior” (i.e. putting in effort to pay off an existing card balance over time) while FICO scores do not. But even within one scoring system there can be discrepancies between your score, depending on which scoring model is being used.

“It’s critical that you know what score you’re looking at. Not just if it’s a FICO score, but is it the same FICO score as the one you’re used to,” Griffin says.

For instance, a typical FICO score has a score range between 300 and 850, with 850 being the best possible score. But a lender for an auto loan will often use the specific FICO Auto Score, which goes up to 900 points, so your score could appear dramatically different on that report when you’re preparing to buy a car.

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 good look at your full credit report for any suspicious activity. Purchases you don’t remember making, loans taken out in your name and maxed out credit cards you never signed up for are major red flags of identity theft.

“Someone maxing out a fraudulent or stolen account could certainly affect your credit score,” Griffin says. “That’s why we always encourage people to check their credit histories regularly.”

Unlike most of the other reasons that your credit score might drop, if you’re a victim of identity theft, you will be able to remove the activity that’s hurting your score from your credit report. But it’s better to catch suspicious activity sooner rather than later in order to avoid spending hours trying to verify the legitimacy of every item on your report.

Enrolling in a free credit monitoring service like those offered by Experian and Credit Karma can help you catch and protect yourself from fraud.

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