Did you notice a tiny dip in your credit score and wonder what might have triggered it? Minor fluctuations are no grounds for concerns, but larger ones may be a red flag. If you notice a drop of 15 points or more, consider finding out the background of the problem. Possible reasons usually include credit reporting errors, actions you’re not aware of, or identity theft.
Below we’ve listed the potential missteps that may cause your credit score to drop temporarily. You will also find practical advice on how to prevent each issue from happening. So read on and learn how to put the right plan in motion to increase your credit score.
Reasons Why Your Credit Score Dropped
If you notice your credit score faced a sudden drop, pulling your credit report and reviewing all negative items is the first step to understanding why scores decline.
Here are seven viable reasons to support your claim:
Late or Missing Payments
You may think your credit score dropped 30 points for no reason, but you may not be aware of some minor changes that affect your credit reports in a big way—one of those is your payment history. On-time repayments account for 35% of a FICO score and keep it in top shape. Hence, even a single missed payment can impact your rating adversely.
Consequently, most lenders will report your past-due payment to at least one credit bureau. Late payments that exceed 90 days will have a more detrimental effect and drop a fair score for up to 47 points. Lenders will then perceive you as financially irresponsible and unable to pay off debt.
The worst-case scenario for delinquent payments is to end up in a collection agency. All collection accounts get recorded on your credit history and shatter your creditworthiness. Negative items usually remain on your credit files for up to seven years.
So, it’s of the utmost importance to pay any outstanding debt on time. This way, you can build a strong credit history for many years.
Applying for a New Credit Line
You may realize that your score lowered after getting a credit card. Maybe the reason for this drop was because you took out a new credit card, used it to purchase various items, or you may have applied for other credit products.
However, other processes happen in the background that you may not be entirely familiar with. For example, card issuers will pull your report to ensure you’re not a high risk once you request a new credit line. A credit check before the lender approves a loan is a hard inquiry.
Each hard inquiry can lower your score by several points for a short period and remain there for up to two years. More so, a few applications within a short timeframe of three months can create a vast dent in your file.
Yet, hard inquiries can also help you build credit if you make them in moderation. The ideal approach would be to prequalify for the new credit card you’re planning to take. This way, you can spare yourself the trouble of getting rejected and losing points on your credit report.
Also, it’s advisable to spread out hard inquiries over more prolonged periods. For instance, you can space out new credit requests every six months and opt for convenient offers.
Closing a Credit Card
You finally paid off your debt and decided to close all credit cards; however, closing a credit card account, particularly an old one, will reduce your available credit limit. The domino effect will also impact the overall average age of your accounts. As a result, reducing the limit and age of your credit will cause a dip in your score.
A justified case to close down a credit card is if you no longer need it. You may also consider closing luxury travel credit cards and those with steep annual fees.
Think thoroughly before closing any of your credit cards. Consider having a word with your card issuer to downgrade to a product with no annual fees or upgrade to an unsecured credit card, depending on what you need to preserve your creditworthiness. This way, your oldest credit card account won’t show up as closed, and you’ll get better-termed products.
Reducing Credit Limits
Lowering your credit limit and keeping your spending consistent will drop your score due to the increased credit utilization ratio. How is this possible?
Let’s suppose your credit utilization rate is 20% because you typically spend $1,000 of the $5,000 credit limit. If you reduce the limit to $3,000 and spend $1,000 again, the ratio will suddenly rise to 60%. Hence, consider shrinking your spending limit to increase your credit score in the long term.
In this case, applying for a balance transfer credit card with a 0% introductory rate might be an ideal choice. By doing so, you will raise the total credit limit without affecting the credit utilization rate adversely.
Derogatory Marks on Your Credit History Report
Credit scores depend on all the information in your credit reports. A listed bankruptcy, for example, will damage your score for many years. So, while a Chapter 13 bankruptcy can stain a credit report for seven years, a Chapter 7 bankruptcy will do so for ten years.
Other derogatory remarks include foreclosures and collection accounts. A foreclosure occurs when you fail to pay off your mortgage. Similarly, creditors will send your account to collections if you default on a loan. Such unfavorable marks stay on your credit report for seven to ten years, but the impact fades away over time. Here are the most common derogatory marks on credit reports:
- Debt settlement
- Tax lien
- Account in collections
- Civil judgment against you
Paying Off a Loan
It might not add up, but repaying a car loan can cause a sudden dip in your credit score. A plausible reason for the adverse change is your credit mix that accounts for 10% of scores. Overall, a healthy mix of installment loans and revolving credit shows lenders that you can handle various debt types.
But this shouldn’t dissuade you from settling payday loans online. It may seem illogical to pay high interest and fees to win a few points. Instead, you can always build your credit scores without juggling several loan types.
Making a Large Purchase
Using a credit card to pay for expensive furniture or appliances is convenient since you won’t pay upfront. Still, the high balance that month will report an increased debt-to-credit ratio to the credit bureaus.
Your credit utilization ratio measures the relationship between the available credit and how much of it you use. A high utilization rate tells creditors that you might pose a financial risk. It’s recommendable to keep your DTI ratio below 30% for a better credit score.
Moreover, ensure you settle more significant purchases before the billing cycle ends. If you pay the balance off promptly, you’ll avoid high interest, and the updated version of your credit report will show an upward trend.
Why Did Your Credit Score Go Down When Nothing Changed?
Often, you may witness a credit score that fluctuates up or down when you haven’t taken any action to affect it. But that’s only true to the layman’s eye. Other steps taken beyond your control can drop your credit score.
Inaccurate Credit Report
Mistakes can happen, though rarely, in the form of incorrect personal data or payment history. To prevent this from hurting your score, review your credit files regularly. You can request a free report from Equifax, Experian, and TransUnion by visiting AnnualCreditReport.com.
Errors can also occur due to wrongly reported information by your lender. Alternatively, they can be an indicator that you are a victim of identity theft. If you spot any inaccuracies, dispute them with the three credit bureaus. According to the CFPB, credit report inaccuracies are common issues for consumers.
Agencies must investigate the dispute for free and correct any confirmed errors right away. Note that aside from informing the credit bureaus, you must also report the incorrect items to your lender.
Increased Credit Utilization
Since we’ve already explained how a reduced credit limit can impact your credit score negatively, let’s explore the opposite scenario. You have an excellent record of on-time payments on your only credit card. Unfortunately, you’re using 80% of the credit utilization rate, so your credit score could suffer. Again, your goal is to keep the utilization ratio below 30%.
In this case, opening another account and splitting the credit usage between both can save the day. Using credit wisely and maintaining utilization low on both cards will soon increase your credit score by many points. If you fail this feat, you may end up dropping your score due to maxed-out credit cards.
Those who carry a high balance and thus a high utilization rate should avoid making the minimum payments. Lowering the DTI ratio and increasing your FICO score will only happen if what you pay off exceeds the minimum amount.
One of the most frequent reasons for a credit score to drop 50 points for no apparent reason is identity theft. Many thieves target individuals with good or excellent scores. Thus, it’s vital to check your credit report as a security measure at least three times a year.
In short, an ID fraud occurs when a con tries to use your financial and personal information to apply for legitimate payday loans. Even worse, hackers can exploit stolen information to open new credit accounts. Eventually, you will end up with delinquent debts in your name and a poor credit rating.
Cosigning a New Credit Line
The minute you decide to cosign a loan, you come to share the responsibility for any outstanding debt. Cosigned credit lines along with missed payments will appear on your report and drag your score down. Plus, you become liable to settle the debt if your spouse, friend, or relative can’t. The same goes if the borrower doesn’t pay rent on time and you have cosigned their lease.
Once the procedure goes through, you’ll notice a drop in your credit due to the increased DTI ratio and overall debt. However, if the borrower pays in full and on time, your score will grow in a few months. If the borrower misses payments, your credit score could suffer as if the loan was yours.
Keep in mind that creditors will not notify you that loan repayments have stopped. Hence, don’t cosign loans if you have measurable debt or plan to apply for new credit products and services. Only agree to cosign if you trust the person and have witnessed that they are responsible with money. Finally, prepare to take on any debt liability that might fall on your back if the original borrower defaults.
Someone Else Used Your Credit Cards
Anyone, including your family members, can use your credit cards without your knowledge. Aside from cons, friends, spouses, and roommates have often succumbed to stealing cards and exploiting them. The outcome is always the same; you end up with a high credit card balance without having the slightest idea why.
Scammers can clone credit cards easily since all they need to open an account on your behalf is your Social Security Number. If you’re a victim of fraud, contact your card issuer. In most cases, you won’t have to bear the burden if a stranger misuses your cards. Also, it would be worthwhile to set up alerts that inform you every time your card gets swiped.
Should You Worry When Your Credit Score Drops Suddenly?
Slight variations in your credit score are no reason for concern. But if you see an unexpected change in your history, raise the alarm. More precisely, take some time to investigate the matter and procure evidence of why your score dropped.
Significant dips in scores are a result of specific actions taken. Unfortunately, most Americans are unaware of what borrowing behavior can affect their credit scores; however, even things that aren’t obvious, such as cosigning a loan or paying off debt, can lead to temporary drops.
Therefore, check your credit file regularly to monitor any changes that might occur. An unexpected loss of points is another reason to be wary of illegal action, so it’s always worth it to know what triggered the plunge to be able to remedy it.
Can a Credit Score Drop Without a Reason?
Credit scoring models monitor your account activity to assign you a rating. So, infrequent or no action can lead to a lowered score. On the other hand, maintaining active and open credit cards can help keep your credit in shape.
The way you handle your loans will have an immense impact on your FICO score, too. For example, avoiding credit cards for months and no borrowing activity might exclude you from calculations and result in a drop with no apparent reason.
It is also possible that your credit card issuer has raised or lowered your credit limit. If you have been spending equal amounts as before, any change in your credit utilization ratio can damage your credit report.
Checking your credit score to find that it dropped a few points can make you anxious, which is why it’s vital to be aware of the possible reasons that lead to such dents. Only then can you take action to offset the damage on your credit report and get your score back on track.
Some tips that can help you maintain a good score include setting up automatic payments and keeping within the suggested DTI ratio—30%. You can also consider correcting errors or disputing derogatory remarks on your credit report.