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Whether you’re keeping a close eye on your credit score because you want to make a large purchase soon, such as house or a car, you’re trying to rebuild your credit, or you just happen to receive alerts about your credit score from a credit monitoring system – it is no fun when you’ve realized it dropped.
You know that things like missing a payment, receiving a new inquiry, or closing an account can negatively impact your score – but if you haven’t done anything, it can be alarming to see a drop in your score. This article will cover 9 reasons why your credit score may have dropped and how you can fix it.
9 Reasons Why Your Credit Score May Have Dropped
Credit scores fluctuate regularly – so small drops aren’t typically a cause for concern. But if it was a bigger drop that you can’t explain, or you just want a clearer idea of what happened, continue on.
A Collection Dropped Off Your Credit Report
If you are trying to repair your credit, you may have a few items in collections on your report – even if you’ve paid them. After a certain amount of time, those accounts will fall off your credit report. That sounds good, right?
In the long-term, it is. But in the short term, it can temporarily lower your score. FICO places people in different buckets, known as scorecards. Your credit profile is compared to people who are in the same scorecard as you – and then your credit score is based on that. While you may have been one of the “best” creditors in a lower scorecard, you may drop to the bottom when placed in a new scorecard bucket as your overall credit factors improve (i.e. fewer accounts in collections.)
How to Fix: This drop is not one you can do much about. Just keep paying your bills on time and keep your debt levels low. Over time, your credit score will improve again.
You Applied for Credit (But Forgot About It)
Sometimes a good deal is too hard to pass up, right? When one of your favorite retailers is offering a huge discount if you open a credit card with them – it can be hard to say no. But if you pay that purchase off quickly because it’s money you had planned to spend anyway – and don’t use the card again, you might forget about it by the time the inquiry is reflected on your credit report.
Credit inquiries make up about 10% of your credit score. That means that inquiries have the power to drop your credit score by a significant amount.
How to Fix: The good news is that inquiries only affect your credit score for up to a year. Avoid applying for additional credit during the next 12 months, and your credit score should continue to increase, provided you don’t make any other changes.
Your Credit Utilization Percentage Increased
You needed a new outfit for an upcoming event and so you put it on a credit card – an extra $100 on your balance shouldn’t throw your score out the window, right? Honestly, it can. Credit utilization is a big part of your credit score.
What is credit utilization? Credit utilization is the percentage of your available credit that you’re using. You calculate it by dividing your total amount of debt by your total amount of available credit. You want to aim to keep this percentage between 20-30%. Generally going much lower than 20% can actually impact your score negatively, too, as you’re not using your credit (so you’re not showing your responsibility with it.)
If that extra purchase, even if it was smaller, pushed your credit utilization into a new “bracket” i.e. from 39% to 40%, it may have been enough to significantly lower your score.
How to Fix: Pay down your credit accounts again to get your overall utilization under 30%. By keeping your credit card utilization around 30%, you will build your score back up quickly.
You Lost Some Credit
If you’re rebuilding your credit score after a relatively recent lapse, and your credit score lowered significantly, one of your credit issuers may have lowered your limit. If that’s the case, and you already have a small balance on that account, this will drive your credit utilization up – and your credit score down.
How to Fix: Pay off the balance on the new, lower credit account. You should strive to keep your credit utilization around 30%.
You Accidentally Paid Something Late
Payment history has a huge impact on your credit score. If any of your payments are more than 30 days late, it is reported to the credit bureaus and then that is reflected in your credit score. Any late payment will likely cause your credit score to drop. If you don’t think you made any late payments, but can’t otherwise explain why your credit score dropped, it might be worth double-checking all of your accounts for overdue payments – just in case you missed one.
How to Fix: There isn’t much you can do in this situation. Sometimes, depending on your relationship with the lender, you might be able to request they reverse a one-time late payment from showing up on your credit report. Otherwise, just continue making on-time payments and your credit score will bounce back.
You Made a Large Purchase
As mentioned, your credit utilization plays a very important role in your overall credit score. If you make a large purchase on your credit card one month, you could see your score drop even if you pay the balance off in full on your due date.
That happens because credit card issuers usually report your balance on the last day of the billing cycle – but your due date isn’t until after that date. That means the balance that showed up on your credit score was much higher than what it is now.
How to Fix: The good news is that this one is relatively easy to come back from. If you haven’t already, pay down the balance. Avoid making any other credit card purchases and wait for your lower balance to reflect. Your credit score should come back up once your lower balances are reflected.
Inaccuracies on Your Credit Report
Credit report inaccuracies are rare, but they do happen. One of the best ways to protect yourself is to check your credit reports regularly. If something in your credit report looks wrong, it could be because a lender accidentally sent incorrect information – or it could mean that you are a victim of identity fraud.
How to Fix: If you see something on your credit report that you believe is inaccurate, you should dispute it with all 3 credit bureaus. While you may not be able to fix your score until the credit bureaus review your dispute, you’ll be on the road to getting your score back on track
Someone Else Used Your Credit Card
Another common reason your credit score may have dropped for a reason you aren’t sure about is if someone else used your credit card account. It could have been your child, your spouse, or a stranger – but someone may have charged a big purchase and you might not have known. If you still aren’t sure why your credit score dropped, check the balances and charges to all of your credit accounts. Make sure you recognize all of the charges (or that your spouse does).
How to Fix: If a stranger used your card, call your credit card agency. They’ll send you a new card and you won’t be responsible for those charges. Unfortunately if it was someone in your family, you’ll be stuck paying off the balance in order to improve your credit score (or returning the items, if possible).
You Paid Off a Loan
You may have celebrated paying off your loan – but it can actually lower your credit score. Once you pay off a loan, you end up having one less credit account than you did. If you didn’t have very many accounts to begin with, or if that was your oldest credit account, your score can actually drop.
How to Fix: Make sure you keep your other accounts open. Pay them on time and keep utilization around 30% (or less). The longer your track record of paying on time and maintaining accounts is – the better your credit score will be.
These are 9 of the most common reasons people tend to see unexpected negative changes to their credit scores. If you go through this list and still aren’t sure why your credit score might have changed, it may be worth reaching out to a credit or financial counselor, who can help you better take a look at your overall credit picture.
Keep in mind that small drops in your credit score are normal and to be expected. As long as you continue to pay your debts off on time, keep your credit utilization low, keep your accounts open, and protect yourself from identity theft – you should see an overall upward trend for your credit score.
About the Author
Melinda Pettijohn is an expert personal financial writer with more than 10 years of experience in the industry. She covers topics ranging from budgeting, additional ways to make money, credit cards, managing debt, paying for college, and more. As a mom of three kids, she especially loves sharing insights on how to make the most of your money while raising a family.