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Home Credit Repair Why Did My Credit Score Drop?

Why Did My Credit Score Drop?

Why did my credit score drop?

At a glance

Many things can cause your credit score to drop, but whatever the reason, there are steps you can take to help your score recover. Read on to learn why your score may have dropped and what you need to do to get back on track.

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Written by FinanceJar Team

Reviewed by Victoria Scanlon and Robert Jellison

Oct 4, 2021

Fresh advice you can trust

We promise to always deliver the best financial advice that we can. That's our first priority, and we take it seriously. Our writers and editors follow strict editorial standards and operate independently from our advertisers and affiliates. Learn more about how we make money.

Table of Contents

  1. Why did my credit score drop for no reason?
  2. Negative marks on your credit report
  3. Habits that may be damaging your credit score
  4. Penalties imposed by your creditor
  5. Mistakes on your credit report

Why did my credit score drop for no reason?

Credit scores usually update frequently, and it’s normal for them to fluctuate slightly over time. However, major drops are usually caused by changes in the information on your credit report, which the main credit scoring models (FICO and VantageScore) consider when calculating your score. For example, if you miss a payment on one of your credit accounts, your creditor will report that to the credit bureaus, which will damage your score.

Broadly speaking, there are four reasons your score might have dropped:

  • You have negative marks on your credit report
  • Your credit habits are lowering your score
  • Your creditor has penalized you for something
  • There are errors on your credit report

We’ll cover exactly how those issues may have caused your credit score to drop and what you can do to fix your score. While you may not see dramatic gains, like a quick score increase of 100 points, there’s no better time than now to get yourself back on track.

Negative marks on your credit report

If you have negative marks (also known as derogatory marks) on your credit report, they’re almost certainly hurting your score.

Common negative marks include:

Late or missed payments

The most important component of your credit score is your payment history, which accounts for 35% of your score in FICO’s model. When you miss a payment on one of your credit accounts, you have a 30-day grace period before your creditor reports it to the credit bureaus. Once they do, you’ll receive a negative mark on your credit report and your score will drop.

The penalties you’ll face for your delinquent account will become more and more severe the more overdue it gets. 1 If you go long enough without paying, your creditor will charge off your account and send it to a debt collection agency, which is even more damaging to your credit.

If you’ve missed a payment, quickly get in touch with your creditor to discuss your options and stop them from charging off your account. Some creditors have hardship programs and other debt-relief options that can help you get back on track. To avoid missing payments in the future, set up personal payment reminders or sign up for autopay.

If you’ve already paid off the account, you might be able to send a goodwill letter to your creditor to remove the late payment from your credit report. If you haven’t, consider negotiating pay for delete instead.

Bankruptcy

Since 2018, credit bureaus have been prohibited from including most public records on your credit report. Bankruptcy is the one exception. 2

Bankruptcy is devastating to your credit score, and depending on the type that you file for, it’ll stay on your credit report for 7 years (chapter 13) or 10 years (chapter 7). 3

Unfortunately, there’s no way to get a bankruptcy off your credit report early. However, the effect it has on your credit score will gradually diminish over time.

Foreclosure

If you took out a mortgage but you’re 120 days late on your payments, then your lender may pursue foreclosure. 4

Like bankruptcy, foreclosure damages your credit score. As with other negative marks, foreclosures also stay on your credit report for 7 years.

After a foreclosure, you’ll generally have to wait a while before you can take out another mortgage. For example, you won’t be able to get an FHA-backed mortgage for three years. 5 The good news is that, as with all other negative marks, the negative effects of foreclosure on your credit score will diminish over time.

Hard inquiries

If you recently applied for a credit card, loan (either secured or unsecured), or another new line of credit, then the lender probably conducted a credit check called a hard inquiry. This type of credit check temporarily lowers your score. 6

A single hard inquiry will usually affect your credit score by five points or less, which isn’t very much. However, if you trigger a lot of them in a short span of time, the damage to your score can add up.

The credit scoring models count multiple hard inquiries for the same type of loan as a single inquiry if you trigger them within a relatively short period (45 days in the FICO model and 14 days in the VantageScore model). 7 8 However, in FICO’s model, this only applies to certain types of installment loans—FICO always counts multiple hard pulls for credit card applications separately.

Hard inquiries stay on your credit report for two years, but they only affect your score for six months (VantageScore) to a year (FICO).

Habits that may be damaging your credit score

If you don’t have any negative marks on your credit report, it’s possible you’re using your credit in a suboptimal way. If this is the case, you’ll be able to fix your credit score very quickly by changing your habits.

Your credit might be suffering for the following reasons:

You’re spending too much on your credit cards

Your credit utilization rate, the percentage of your total available credit that you’re using, is the second most important factor that affects your credit score, accounting for 30% of your FICO score. A lower utilization rate is better; depending on your credit history, maxing out one of your credit cards could cause your credit score to drop by more than 120 points. 9

If you’ve started using credit more often or you recently made a large one-time purchase, your utilization rate might have risen. Thankfully, this is easy to recover from if you pay down your debts and adjust your spending habits.

It’s important to keep your utilization rate under 30%, but you should keep it even lower if you can. A single-digit utilization ratio is ideal. 10

The credit scoring models award more points to people who use less of their available credit because it indicates that they have a lower risk of not paying back their debts.

You have no installment loans

If you only have revolving credit accounts, your score will suffer. This is true even if you recently paid off an installment loan, such as a personal loan or a mortgage.

It’s a bit counterintuitive, but fully paying off a loan can actually hurt your credit score. This is because paying off a loan closes the account, and closed accounts aren’t given as much weight as open accounts in the credit scoring models. This means you won’t benefit as much from your positive payment history on that loan. 11

Additionally, FICO and VantageScore reward you for having a good credit mix of revolving and installment accounts. If you recently closed your only installment loan, your score will drop.

Fortunately, paying off a loan won’t completely erase its positive influence on your credit score—it will just diminish it a bit. Closed accounts in good standing stay on your credit report for up to 10 years, and usually continue to benefit your credit score. 12

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Should you keep an installment loan open to maximize your credit score?

In many cases, the financial benefits of paying off a loan early outweigh the small dip you might see in your credit score. However, it might be worth keeping your loan open if its interest rate is very low or if you’re trying to optimize your score to get good rates on a mortgage or another large loan in the near future.

Penalties imposed by your creditor

If you’ve been using your credit irresponsibly (or alternately if you haven’t been using it at all), your creditor might penalize you by lowering the amount of credit they’re willing to extend to you or by closing your accounts. If they do, it will affect your score.

The penalties that lenders sometimes impose include:

Lowering your credit limit

A decrease in your credit limit will increase your credit utilization rate, potentially causing your score to drop. If you’ve missed a payment or forgotten to pay the membership fee on your card, then it’s possible that your credit card issuer has decided to lower your spending limit, which they can do without warning. 13

If this has happened, contact your credit card issuer to find out whether they’re willing to restore your previous limit. Alternatively, you can increase your utilization rate by applying for a new credit card, although opening a new credit card will cause your credit score to drop temporarily due to the hard inquiry and decrease in the average age of your accounts.

Closing your credit card

Your creditor might close your credit account if you haven’t used it in a few months, although the exact amount of time they’ll wait before doing so depends on the company. They’ll also probably close your account if you become severely delinquent and they plan on charging it off and selling or transferring your debt to a collection agency.

In most cases, creditors can close your account without giving you any notice. 14

Closing a credit card can negatively impact your score in several ways:

  • Increasing your credit utilization rate: Closing a credit card account increases your utilization rate by reducing the overall amount of credit you have available.
  • Reducing your credit mix: If your issuer closes your only revolving account, your credit mix will drop, harming your score.

If your card issuer has canceled your account due to inactivity but you want to keep it open, contact them to discuss your options. It’s possible they’ll reactivate your account, but you may have to undergo a credit check (just as you would if you were opening a brand new account). 15

Mistakes on your credit report

If none of the reasons above explain the drop in your score, it’s possible there’s an error somewhere on one of your credit reports. Unfortunately, this is fairly common—credit reporting errors affect roughly 20% of Americans. 16

While most errors are minor, some are very damaging. They can cause a substantial drop in your credit score and make it hard for you to get credit.

The Consumer Financial Protection Bureau identifies four types of error that commonly show up on credit reports: 17

  • Personal information errors: Your identifying information (such as your name, Social Security number, etc) may be listed incorrectly (for instance, if the credit bureau confused you with someone with a similar name).
  • Account status errors: Your account status may be misrepresented, such as if an account in good standing is listed as delinquent or an account is listed multiple times.
  • Balance errors: Your account balances or credit limits may be reported incorrectly, affecting your utilization rate.
  • Data management errors: One of your accounts may be listed twice under different lenders. Corrections to previous errors can also accidentally be undone.

If you haven’t done so already, carefully check your credit reports for these errors. You can request copies of all of your reports from the three major credit bureaus (Equifax, Experian, and TransUnion) by visiting AnnualCreditReport.com (which is a safe website for requesting credit reports) or by calling 1-877-322-8228. You’re legally entitled to one free copy from each bureau every year (currently one per week due to the COVID-19 pandemic).

If you do find any errors on your credit report, file a dispute by sending a letter to your creditor and the credit bureau(s) reporting the incorrect information.

Some errors are the result of identity theft

If your score has plummeted for no apparent reason, then it could also be a sign that a fraudster has been using your credit or opening new accounts under your name.

To find out whether you’ve been targeted by identity thieves, get a copy of your credit report and check whether there are any errors in your personal information or accounts you didn’t open. If you believe your identity has been stolen, protect your credit by immediately setting up a credit freeze, notifying your creditors, changing your passwords, and filing a report at IdentityTheft.gov to set up a recovery plan.

To repair your credit, send the same report alongside a dispute letter to your lender and the relevant credit bureaus. Request corrections to your credit reports. They should complete the investigation and update your records within 30–45 days. 18 Be sure to check your credit reports to ensure that they’ve done so.

Takeaway: Major credit score drops are usually caused by changes on your credit report

  • The drop in your credit score may be due to a late payment, a change in your utilization rate, or recent events such as bankruptcy or foreclosure.
  • Other potential causes include closed accounts, new applications for credit, credit reporting errors, and identity theft.
  • If your credit report contains errors or evidence of fraudulent activity, send a dispute letter to the credit bureaus and take security measures to protect yourself, such as freezing your credit and filing an identity theft report.
  • Regardless of what caused the drop in your credit score, your score will recover over time.

Article Sources

  1. myFICO. "What are the different categories of late payments and how does your FICO® Score consider late payments?" Retrieved October 4, 2021.
  2. Consumer Financial Protection Bureau. "A new retrospective on the removal of public records" Retrieved October 4, 2021.
  3. Consumer Financial Protection Bureau. "How to rebuild your credit" Retrieved October 4, 2021.
  4. Consumer Financial Protection Bureau. "I can’t make my mortgage payments. How long will it take before I’ll face foreclosure?" Retrieved October 4, 2021.
  5. United States Department of Housing and Urban Development. "Section C. Borrower Credit Analysis" Retrieved October 4, 2021.
  6. myFICO. "Credit Checks: What are credit inquiries and how do they affect your FICO® Score?" Retrieved October 4, 2021.
  7. FICO. "Score a Better Future’ Increases FICO Score Understanding" Retrieved October 4, 2021.
  8. VantageScore. "9 Myths About Credit Scores" Retrieved October 4, 2021.
  9. FICO. "How Credit Actions Impact FICO Scores" Retrieved October 4, 2021.
  10. VantageScore. "Did You Know…The optimal credit card utilization percentage is…" Retrieved October 4, 2021.
  11. Experian. "Will Paying Off a Personal Loan Early Help My Credit?" Retrieved October 4, 2021.
  12. TransUnion. "How Long Do Closed Accounts Stay on My Credit Report?" Retrieved October 4, 2021.
  13. Consumer Financial Protection Bureau. "Can my credit card issuer reduce my credit limit?" Retrieved October 4, 2021.
  14. Consumer Financial Protection Bureau. "I just learned that my card issuer has closed my account without giving me any notice. Can they do that? What can I do?" Retrieved October 4, 2021.
  15. Equifax. "Inactive Credit Card: Use it or Lose it?" Retrieved October 4, 2021.
  16. Federal Trade Commission. "In FTC Study, Five Percent of Consumers Had Errors on Their Credit Reports That Could Result in Less Favorable Terms for Loans" Retrieved October 4, 2021.
  17. Consumer Financial Protection Bureau. "What are common credit report errors that I should look for on my credit report?" Retrieved October 4, 2021.
  18. Consumer Financial Protection Bureau. "If a credit reporting error is corrected, how long will it take before I find out the results?" Retrieved October 4, 2021.

FinanceJar Team

Staff Writers & Editors

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The FinanceJar Team is a group of financial experts, writers, and industry professionals who collaborate to bring you fresh and simple insights into your finances. They're dedicated to guiding you toward the right path on your financial journey.

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