Key takeaways:
- Slight variances in your credit score are common and generally nothing to worry about. If your score drops more than 10 or 15 points, it’s important to determine the cause.
- Common financial activities, like opening a credit account, paying off a loan, or placing a large purchase on your credit card, can cause your score to drop.
- You can work to restore your credit score through good financial habits, like paying your bills on time, minimizing the number of credit applications you submit, and monitoring your credit report.
It’s not unusual to see changes in your credit score. Credit scores fluctuate frequently based on your financial habits. But if your score dropped by more than 10 or 15 points, there may be cause for concern.
Your score may have dropped for several reasons, ranging from a credit report error to a new credit application. In this guide, we compiled several common reasons why your score may have dropped. We also provide tips on ways you can improve your score if it’s taken a hit.
10 common reasons why your credit score dropped
Curious why your credit score dropped? Consider some of the most common reasons below:
1. You missed a payment
Payment history is one of the most important factors in determining your credit score. In fact, it makes up 35% of your FICO® Score. Missing even one payment can affect your score.
Generally, creditors provide a 30-day grace period for late payments. During that time, you may be able to make your payment—plus a late penalty—without impacting your score.
However, if you exceed the 30-day delinquency period, your credit issuer may report your missed payment to the major credit bureaus (Experian™, Equifax®, and TransUnion™). Your score will likely drop following the report.
If you don’t make the payment within 60 to 90 days, your score could drop even further. Eventually, your credit issuer may transfer your debt to a collection agency. This process is known as putting your account in collections. An account in collections will show up on your credit report and may remain for up to 7 years.
2. You applied for a new credit account
Have you applied for a new credit card or loan lately? If so, your application may have resulted in a lower score.
When you apply for a new credit account, potential lenders usually run a hard credit check to review certain factors, such as:
- Payment history
- Credit usage
- Account age
- Borrowing habits
A hard inquiry will appear on your credit report and may cause your score to drop by a few points. In this case, focus on making timely payments and avoid submitting more credit applications until your score rebounds.
3. Your credit limit decreased
When you open a credit card account, your creditor will set a maximum credit limit. Your credit limit is usually based on your creditor’s assessment of your creditworthiness and ability to repay debts.
Sometimes, your credit issuer may decrease your limit. This may happen for many reasons, including:
- Lack of use
- Missed or late payments
- Changes in income
- Macroeconomic changes (i.e., the COVID-19 pandemic)
Regardless of the reason why your creditor reduced your limit, it can increase your credit utilization rate.
Your credit utilization rate compares the amount you spend to your total credit limit. Generally, creditors look for a credit utilization rate of 30% or lower. Minimizing your credit utilization rate can have a positive impact on your credit score. Similarly, a higher credit utilization rate can negatively affect your score.
If your credit card company reduces your credit limit, maintaining your existing spending habits may cause your credit score to drop. That’s because you’ll spend a larger portion of your available credit.
For example, say your credit card originally had a $5,000 credit limit. You typically spend about $1,500—resulting in a credit utilization rate of 30%.
However, your credit issuer recently reduced your credit limit to $3,000. If you continue spending about $1,500, your credit utilization rate will increase to 50%—about 20% higher than most credit experts recommend.
Pro tip: If your credit limit dropped, reach out to your credit card company for an explanation. Sometimes, credit limits decrease due to lack of activity or changes in buying behavior. In this case, you may be able to request an increase.
If your credit limit decreases due to missed or late payments or high credit utilization, you may need to focus on monitoring your spending and repaying balances before your creditor will consider a limit increase.
4. You received a derogatory mark on your credit report
A derogatory mark on your credit report means you didn’t repay one or more debts as promised. Derogatory marks can appear for several reasons, such as:
- Late or missed payments
- Charge-offs
- Accounts in collections
- Lawsuits
- Tax liens
- Bankruptcies
Your credit score will typically take the hardest hit when the mark first appears. Derogatory marks can remain on your credit report for up to 10 years.
5. You closed a credit card account
If you no longer use a credit card, it makes sense to close the account—right? Not so fast. Closing a credit card account can cause your score to drop for a few reasons.
- Increased credit utilization ratio: Closing a credit card account can reduce your total available credit and can increase your credit utilization ratio. For instance, imagine you have 3 credit cards with a total limit of $15,000. If you close one card with a $4,000 limit, your total available credit drops to $11,000. Even if your spending remains the same, your credit utilization ratio will rise.
- Reduced average length of credit history: Your credit history length makes up about 15% of your FICO® Score. The longer your credit history, the better the impact on your score.
- Reduced average credit age: Closing your account could shorten your average credit age. But if you close an account in good standing (which means you repaid your balances on time), your good financial habits will remain on your credit report for up to a decade.
6. You have an error on your credit report
Though rare, incorrect information can occasionally appear on your credit report and damage your score.
The best way to identify errors is to check your credit report regularly and verify any information. If you find an error, submit a dispute with all three credit bureaus as quickly as possible.
That way, you can resolve the error and restore your score.
Pro tip: To check your credit report for errors, visit AnnualCreditReport.com and request a free copy of your credit report. Review the activity listed on your file, paying special attention to negative marks like missed or late payments.
Verify details against your records. If you notice an erroneous mark, you can petition to have it removed from your report.
7. You paid off a loan
Congratulations—you paid off a loan! This is a major step toward a debt-free life. Coincidentally, it can also cause your credit score to drop temporarily.
When you pay off a loan, you close the account. This reduces the number and types of credit accounts you have, also known as your credit mix. Your credit mix is one factor credit bureaus consider when determining your score.
Despite this effect on your credit score, you should still work to repay your loan balances and close these accounts in a timely fashion. Then, make timely payments on other debts and use your other credit accounts wisely.
8. You have been the victim of identity theft
If your credit score took a sudden, large dip, you may be facing something more serious, like identity theft.
If you’re a victim of identity theft, someone may have stolen your personal information and applied for or opened a fraudulent credit account in your name. One of the best ways to identify fraud is by monitoring your credit report.
Look for red flags like:
- Unexpected charges
- New credit applications or accounts
- Unfamiliar addresses or personal information
If you spot signs of identity theft, place a fraud alert on your credit file and consider freezing your account. Then, fill out an identity theft report at IdentityTheft.gov.
You’ll need the report to file an official dispute with the credit bureaus. After filing, follow up within 30 days to ensure the revisions have been made and your credit score has been restored.
9. You made a big purchase
Sometimes, even diligent budgeters find themselves facing a large, unexpected expense, like medical bills or an emergency home improvement project. In many cases, those costs wind up on credit cards.
If you’ve recently put a large balance on one or more of your credit card accounts, your score will likely drop. Rather than worrying about the dip, focus on paying off your balances as quickly as possible. You can also ask your credit card company about increasing your credit limit to reduce your utilization rate.
If necessary, you may even decide to use a credit card consolidation loan to combine multiple balances into one monthly payment. Doing so will make managing payments easier and may help you save on interest or repay your loan faster.
10. You became a co-signer on a loan or credit account application
Have you recently agreed to become a co-signer on a loan or credit card? Co-signing may hurt your credit score if the creditor runs a hard credit check during the application process.
And if the account holder misses a payment or racks up a large balance, your score could suffer the consequences. You may also be on the hook for repaying the balance if your friend or family member fails to do so.
If you notice any major changes, get in touch with the account holder as quickly as possible. You may also request statements be sent to your home or email address. That way, you can monitor your co-signer’s financial behavior and stay a step ahead of potential problems.
What to do if your credit score dropped
Whether you noticed a sudden drop in your credit score or are anticipating one, there are several steps you can take to minimize the impact and restore a good credit score.
Consider the following ways to strengthen your credit score after it takes a hit:
Check your credit report regularly
Checking your credit report is one of the best ways to minimize damage to your credit score. By checking regularly, you can watch for errors, fraudulent activity, or other marks against your credit.
Pro tip: Not sure how to check your credit report? You can request a free copy each week from AnnualCreditReport.com.
Avoid applying for any new credit accounts
Did your score drop because of a new credit application? If so, try to wait 3 to 6 months before submitting another application. This gives your credit score time to recover before you subject it to another hard inquiry.
There is one exception to this rule. If you’re shopping around for a loan, you may decide to submit multiple applications in a short period of time. Typically, similar inquiries made within a period of 14 to 45 days are counted as one inquiry on your credit report.
Pay your bills on time, all the time
As mentioned above, your payment history is the most important factor in determining your credit score. With that in mind, prioritize on-time payments, even if you can only make the minimum payment.
Paying your bills on time indicates you can manage credit responsibly. It will also help you build a healthy credit score.
To ensure you never miss a payment, set a reminder on your phone or note it on your calendar each month. You may even decide to set up automatic payments to eliminate the risk of human error.
FAQs: Why did my credit score drop?
Does paying off a loan help your credit score?
Paying off a loan may improve your credit score in the long run, especially if you’ve made timely payments and kept your account in good standing. You may also find that your credit score increases after using a personal loan to consolidate high-interest debt.
Combining multiple high-interest balances with a debt consolidation loan can reduce your overall credit utilization rate, which may boost your score. It may also reduce your debt-to-income ratio, since the monthly payment on a debt consolidation loan may be lower than the combined payments on multiple accounts.
However, in the short term, it may cause your score to drop. Ultimately, its impact on your credit score comes down to factors like your credit mix, credit account age, and credit utilization rate.
Why did my credit score drop 40 points?
A 40-point credit score decrease could have numerous causes, ranging from late or missed payments to changes in your credit mix, account length, or credit utilization. If you notice a drop of more than 10 to 15 points, request a copy of your credit report to determine what caused the change.
Why did my credit score drop after a dispute?
Disputing a derogatory mark on your credit report won’t cause your score to drop, but you may notice it take a hit while the dispute is processing. Typically, this is due to a negative item remaining on your credit report until the dispute is resolved.
After a successful dispute, the negative item will be resolved. Your score should then return to normal.
Does a mortgage transfer affect credit?
Generally, a mortgage transfer or sale shouldn’t affect your credit score. That said, there’s still a chance a major change to your credit report could cause your score to drop slightly.
When will my credit score update?
Typically, your credit score updates every month. It may update more frequently if you have multiple credit lines. Similarly, your score will update each time a credit issuer sends information to the credit bureaus.
Don’t let a dip in your score delay your financial goals
In most cases, a slight drop in your credit score isn’t reason to worry. Still, it’s essential to get familiar with the financial habits, activities, and factors impacting your score.
Most importantly, make it a priority to practice wise spending and borrowing habits. What you spend, save, and borrow can have a lasting impact on your current and future financial wellbeing.
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