There are many different reasons for a sudden drop in your credit score. While some reasons are obvious, others are harder to find.
Our guide will break down 11 different reasons why your credit score might drop and ways to address each issue.
Table of Contents
- You Have Missed or Late Payments
- Your Unpaid Account Was Sent to Collections
- You Made a Large Purchase on Your Credit Card
- Your Credit Limit Was Lowered
- You Applied for a Mortgage, Loan or New Credit Card
- You Closed a Credit Card
- You Paid Off a Loan
- You’re an Identity Theft Victim
- You Cosigned a Loan or Credit Application
- Changes in the Scoring Models
- Your Credit Report Has Inaccurate Information
1. You Have Missed or Late Payments
Payment history is the biggest factor affecting your credit score. In fact, it accounts for 35 percent of your credit score. Creditors typically report a late payment once you are 30 days past due. Late payments stay on file for up to seven years.
If you miss a payment, pay it as soon as you notice your error, ideally before it’s 30 days past due. Your score drops lower after your payments become 60 or 90 days past due. The sooner you send payment to your creditor, the better.
2. Your Unpaid Account Was Sent to Collections
A collections account indicates a severe delinquency, and it will hurt your credit score. A collection account will affect your credit less the older it gets, but it will remain on your credit report for about seven years.
Try asking for a goodwill deletion on accounts you’ve already paid. Sending a goodwill letter to the collector may convince them to remove the collection from your credit report.
3. You Made a Large Purchase on Your Credit Card
Utilization is the balance-to-limit ratio on your credit cards. As the second most significant detail on your credit report, it’s important to keep your credit card balances under 30 percent of your credit limit. A large purchase can increase your credit utilization ratio.
You can lower your credit card utilization by paying off some credit card debt, requesting a credit limit increase on one of your cards, or opening a new credit card. Keeping your credit utilization low by paying off your balances can improve your credit score.
4. Your Credit Limit Was Lowered
If your credit limit is lowered, but your balance remains the same, it raises your credit utilization. In turn, this can lower your credit score.
If your credit limits are lowered, you’ll want to decrease your credit card spending, pay off credit card balances or consider opening a new credit card to get your utilization back under 30 percent.
5. You Applied for a Mortgage, Loan or New Credit Card
When you apply for new credit, you authorize the lender to check your credit score and history. This is known as a hard inquiry and it affects your credit score. Applying for too many cards in a short period of time will make it appear to lenders as if you are desperate for credit.
As long as you don’t continue to apply for new credit, the effect on your score should only last for a year. Focus on cards you have a good chance of getting approved for so that you avoid unnecessary inquiries.
6. You Closed a Credit Card
Closing a credit card affects your credit in two ways. It lowers your overall credit limit and increases your utilization ratio. If the card is your oldest credit card account, it severely lowers the average age of your credit card accounts. The length of your credit history counts for 15 percent of your credit score.
Unless the card has a high annual fee, you might want to keep the account open to maintain your credit limit and length of credit history.
7. You Paid Off a Loan
Paying off a loan gives you more financial freedom, but it can affect your credit score. It leaves you with one less credit account and lenders look for diverse types of credit and an appropriate number of open accounts.
As long as you keep your other accounts active, make payments on time and keep your credit utilization ratio low, your credit score should continue to improve over time.
8. You’re an Identity Theft Victim
A credit score drop could be a sign of identity theft. If you spot problems, such as addresses where you’ve never lived or unfamiliar accounts on your credit report, you should take immediate action.
The FTC runs identitytheft.gov, a website that can help you create a personal recovery plan. You may also want to lock or freeze your credit with the three credit reporting bureaus, or set up a fraud alert.
9. You Cosigned a Loan or Credit Application
You’re legally responsible for any loan or credit card you cosign for, so it can affect your credit if your friend or relative misses a payment.
Keep an eye on the account by having statements sent to your home or monitoring them online. It’s a good idea to set aside money in case you need to cover any missed loan payments.
10. Changes in the Scoring Models
The FICO® scoring model isn’t static, it’s updated periodically to reflect changes in lender requirements, data reporting practices, consumer demand for credit and consumer use of credit. The new version may result in you having a lower score than you had previously.
Every update is designed to separate high-risk borrowers from low-risk borrowers, so keeping your credit card balances low and making payments on time is still the best way to improve your credit score.
11. Your Credit Report Has Inaccurate Information
If a payment is reported late or reported to the wrong account, the mistake could cause your credit score to drop.
Regularly reviewing your credit reports is one of the best ways to ensure your credit report is accurate. If you do find an error, you should dispute the information with all three credit bureaus, assuming the error is on all three credit reports.
Fixing Your Credit
Your credit score can drop for several reasons, so it’s important to regularly monitor your credit report for changes. Watch for mistakes from the credit bureaus or your creditors, since they could unfairly lower your credit score.
If you notice inaccurate or unfair negative items listed on your credit report, our credit repair services can help you work to remove these items and ensure your credit history is fairly reported.