Credit scores usually update frequently, and it’s normal for them to fluctuate. However, major drops are usually caused by changes in the information on your credit report, which the main credit scoring models (FICO and VantageScore) use to calculate your score.
Here are the seven main issues that would cause your credit score to drop (for seemingly no reason) and what you can do to fix it.
Table of Contents
- 1. You applied for a loan or credit card
- 2. You paid your debts late or missed payments entirely
- 3. You spent too much on your credit cards
- 4. You paid off a loan
- 5. Your creditor lowered your credit limit (or closed your account)
- 6. You filed for bankruptcy
- 7. Your home was foreclosed on
- Why did my credit score drop by this particular amount?
1. You applied for a loan or credit card
If you recently applied for a new line of credit, like a credit card or loan, the lender likely conducted a credit check called a hard inquiry. This type of credit check temporarily lowers your score.2
A single hard inquiry will usually affect your credit score by five points or less, which isn’t very much. However, if you trigger several of them in a short timespan, the damage to your score can add up.
Fortunately, 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. For instance, if you applied for several auto loans, the applications will only count as one inquiry. 3
The models differ in how long you’re able to shop around without doing damage: 4
However, in FICO’s model, this grace period only applies to certain loans, not credit cards. FICO always counts multiple hard pulls for credit card applications separately, so make sure not to apply for too many credit cards at once.
How can I recover?
Unless you went on a loan and credit card application spree, you don’t really need to recover from hard inquiries. While inquiries stay on your credit report for 2 years, they really only affect your score for 6 months (VantageScore) to 1 year (FICO). If you’re a victim of identity theft, you can dispute the inquiries on your credit report to get them removed sooner.
2. You paid your debts late or missed payments entirely
Your payment history accounts for 35% of your credit score in FICO’s model, making it the most important scoring factor by far. When you miss a payment due date, your credit score sustains increasingly severe damage as the months go by. 5 Bear in mind that if you have a decent credit score, even one 30-day late payment can decrease your credit score by 45 points or more. 6
5 stages of increasingly severe credit score damage:
- 30 days late: Skipping a monthly payment will hurt your credit score. However, you have a 29-day grace period before your creditor reports your late payment to the credit bureaus, meaning no damage can be done during that time.
- 60 days late: Missing 2 months of payments will hurt your credit more than missing just one payment.
- 90 days late: At the 3-month mark, you’re at risk of serious consequences, such as repossession or collections. If you’ve reached this point and you’re still unable to pay your creditor, contact them to enroll in a hardship program before your late payments get charged off.
- Charge-off: Your creditor will charge off your debt to minimize their losses once they’ve given up on trying to collect payments from you.
- Collections: If you stop paying off an unsecured debt, your creditor may transfer or sell it to a debt collection agency, which will cause a collection account to appear on your credit report and severely damage your credit.
Your credit report will show the above marks if you paid late or haven’t paid your debts, and they would explain the drop in your credit score.
How can I recover?
You’ll need to make your payments on time and wait for your credit history to gradually improve. While the effects will lessen over time, the marks will remain on your credit report for up to 7 years.
You can also attempt the following actions, but they’re unlikely to work:
- If you paid your creditor late: Send a goodwill letter to your creditor asking them to remove the late payment from your credit report out of the goodness of their hearts.
- If your debt has already gone to collections: Try negotiating pay for delete with your debt collectors by offering to pay off your debt in exchange for them removing the collection mark from your credit report.
3. You spent too much on your credit cards
If you started using your credit card more often, or you recently made a large one-time purchase, your credit utilization rate likely increased (and therefore damaged your score). Credit utilization is the percentage of your total available credit that you’re using. For example, if you have a credit card with a $500 limit and you spend $250 on it, your credit utilization rate is 50%.
The credit scoring models award more points to people who use less of their available credit because it indicates they’re more likely to pay back their debts. So when you pass certain utilization thresholds, like 10% and especially 30%, your credit score will take some damage.
In fact, credit utilization accounts for 30% of your FICO score. This is one of the most common (and confusing) reasons for a sudden credit score drop. And it can be severe: Depending on your credit history, maxing out one of your credit cards could cause your credit score to drop by more than 120 points. 7
How can I recover?
Provided you’re in a good financial situation, it’s easy to recover. Just pay off your existing credit card debt and use your credit cards less. 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.8
Beyond that, things get a little more complicated. If you have multiple credit cards, you can spread payments around to lower your utilization rate per card. However, scoring models also reward you for having a zero balance on your cards. How that all balances out is tricky, so your best option is to simply use your cards less.
If you’re not able to pay back your debts quickly, or you have unexpected expenses that you need to use credit cards to pay, it will be difficult to recover until you’re more financially secure, unfortunately.
4. You paid off a loan
It may seem odd, but paying off a loan can actually hurt your credit score temporarily. Paying off a loan hurts your credit score initially for two main reasons: 9
- Closed accounts don’t count as much: Paying off a loan closes the account, and closed accounts are weighted less heavily than open accounts in credit-scoring models. This means you won’t benefit as much from your positive payment history on that loan.
- You may have reduced your credit mix: FICO and VantageScore reward people who are able to manage several types of credit (meaning you have both credit cards and loans) simultaneously. If you had no other loans, paying off this one reduced your credit mix, thus damaging your credit score.
It’s this type of maddeningly counter-intuitive effect that leads people to believe that credit scores are rigged.
How can I recover?
You don’t really need to recover from a credit score drop caused by paying off a loan, and you shouldn’t be discouraged. The hit is temporary, and overall your credit score will recover and grow as you continue to use credit responsibly. Closed accounts in good standing will stay on your credit report for up to 10 years and continue to benefit your credit score. 10
5. Your creditor lowered your credit limit (or closed your account)
If you’ve been using your credit irresponsibly (or if you haven’t been using it at all), your creditor might penalize you in two ways:
- Lowering the amount of credit they’re willing to extend to you
- Closing your account entirely
When either happens, it’ll hurt your score by raising your credit utilization rate. Even if you closed the account yourself, the effect is the same.
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 it becomes severely delinquent and they plan on charging off your debt or transferring it to a debt collection agency.
Your credit card issuer can lower your spending limit or close your account without warning, so avoid failing to repay your debts or card membership fees, and be sure to use it every once in a while. 11 12
How can I recover?
Take the following actions:
- If your limit was decreased: Contact your credit card issuer to find out whether they’re willing to restore your previous limit.
- If your account was closed due to inactivity: 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). 13
You can further 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 by triggering a hard inquiry and reducing the average age of your accounts.
6. You filed for bankruptcy
If you filed for bankruptcy, it really shouldn’t be a surprise to you that your credit score dropped suddenly and severely. Since 2018, while credit bureaus have been prohibited from including most public records on your credit report, bankruptcy is the one exception. Needless to say, bankruptcies are devastating to your credit score. 14
How can I recover?
Unfortunately, there’s no way to get a bankruptcy off your credit report early unless it’s an error. Depending on the type of bankruptcy that you file for, it’ll stay on your credit report for 7 years (chapter 13) or 10 years (chapter 7). 15 However, the effect it has on your credit score will gradually diminish over time.
7. Your home was foreclosed on
If you took out a mortgage but you’re 120 days late on your payments, then your lender may pursue foreclosure. 16
Like bankruptcy, foreclosure damages your credit score significantly. As with other negative marks, foreclosures also stay on your credit report for 7 years.
How can I recover?
Unless it’s a mistake on your credit report, you’ll need to practice good credit habits for a long time, likely years, before you can recover fully. The good news is that, as with all other negative marks, the negative effects of foreclosure on your credit score will diminish over time.
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 3 years. 17
Why did my credit score drop by this particular amount?
It’s not really possible to know exactly why your score dropped by a specific amount of points due to the complexity of credit scoring algorithms. The reason will be unique to your own credit history. However, you can use these score groupings to get a general idea. The only way to know for sure is to check for negative items on your credit report.
Bear in mind that the reason your score dropped could be a combination of any of the following reasons:
Reasons for a Credit Score Drop
|Number of points your score dropped||Why it may have dropped|
|1-9||- You applied for a credit card or loan, resulting in a hard inquiry (or several)|
|10-50||- You paid off a loan, reducing your credit mix
- You charged more than usual to your credit card, increasing your utilization rate
|51-100||- You failed to pay a debt for 30 to 60, days, and received increasingly severe penalties|
|100-199||- You failed to pay a debt for 90 days
- Your unpaid debt got charged off
- Your unpaid debt got sent to collections
- Your house was foreclosed on
|Over 200||- You filed for bankruptcy|
The table above assumes you have a decent, 700+ credit score. If you have a lower credit score, negative items won’t decrease your score by as much.