credit score dropped when nothing happened

Why Did My Credit Score Go Down When Nothing Changed?

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So you have made it a habit to check your credit score each month to keep tabs on it. Your credit card allows you to check your FICO score for free using your online app. Then you notice that your credit score has dropped suddenly and you’re not sure why.

Does this scenario sound familiar?

A credit score drop doesn’t happen by itself. Even though it may seem like it.

Since there are so many factors that go into credit scoring, it’s not uncommon to not know why it happened.

A drop in your credit could be related to many different factors, and it doesn’t mean that you did something wrong. But it’s not a good feel feeling to see a credit score drop so being able to quickly identify the cause can help you go in the right direction from there.

If you’re asking yourself, “why did my credit score go down when nothing happened?”, keep on reading to find out the common reasons credit scores drop and what to do about it.

Why do credit scores change?

Credit scores are computed by looking at many factors that are found on your credit report. There are well over 30 types of credit scores and since they are calculated differently, your score is different depending on the source.

The FICO score is one of the most widely used scores. It was created by Fair Isaac Corporation and roughly 90% of the top lenders use your FICO score to make credit decisions.

There are five factors that credit scoring companies use to calculate your score. These five categories are:

  • Payment history
  • Credit utilization
  • Length of credit history
  • Credit mix
  • New credit

As mentioned, these different pieces of credit data are pulled from your credit report. The three major consumer credit reporting agencies are Experian, TransUnion, and Equifax.

You’re eligible to receive a copy of your credit report at least once a year for free from each credit reporting agency. It’s recommended that you do this at least once a year to check your credit report for errors.

Depending on your credit card issuer, you may also receive a copy of your credit report as part of your service. Many issuers like Capital One include free credit score and credit monitoring for their customers. The credit report is typically provided through one credit bureau, so you will still need to get a copy of your report from the other companies.

If you don’t have a credit card issuer that provides a free credit score service, there are some that will provide a credit score for free. Credit Karma, for example, offers a free credit score for people that sign up on its website.

Reasons why your credit score may drop for no reason

Because there are so many reasons that you might experience a credit score drop, it’s important to identify its root cause. Depending on the reasoning, you can take the appropriate steps to address the problem.

Inquiries

Have you recently applied for a car loan with a lender? Or perhaps you’ve reached out to several lenders to find out the best auto loan deal? Each lender will make a credit inquiry into your credit report to determine if they will lend to you and at what interest rate.

In the above scenario, if you are shopping for an auto loan or mortgage within a short time frame (i.e. 30 days or less), these inquiries are typically grouped together. That will drop your credit score, but shouldn’t affect it substantially.

Alternatively, if each credit inquiry is spaced out for a longer time frame, you could experience a sharper drop. This is also true if you’ve tried to open several credit accounts over a short period.

A lender that sees you’ve opened several credit accounts which view you as a riskier borrower. Plus each new credit account that is opened will incur a hard inquiry into your credit.

A soft credit inquiry occurs when you apply for a new credit account, but doesn’t significantly drop your credit. A hard inquiry will have a much bigger impact on your score. If you have opened several new accounts, the effect will be even greater.

Account or credit card closing

When you pay off a loan, it can actually cause your credit score to decrease. That’s because it means there is one less credit account that’s in your name. Credit mix makes up 10% of your FICO score. It includes installment loans such as student loans or mortgages and revolving loans like credit cards.

When you pay off an auto loan for example, that’s why your credit may experience a decrease. But don’t let this discourage you from paying off your debt. It is better for your financial health to lower your overall debt than lose a few credit score points.

There are different reasons why when you close a credit card, it affects your credit. Closing a credit card can increase your credit utilization rate. For example, let’s say you have three credit cards with a total credit limit of $10,000. Your credit utilization rate is 30% which means you have a revolving balance of $3,000. You close a credit card that has a credit limit of $5,000. Now, your credit utilization has increased to 60%, double what it was before.

Another reason why your credit score goes down when you close a credit card is that it affects your credit history. Closing a credit card may also reduce the length of your credit history. 15% of your FICO score is based on the length of your credit history.

Having a longer history is better for your credit scores. That’s why that it might make sense that you keep your oldest credit card open, even if you don’t use it anymore.

Credit utilization ratio changed

Your credit utilization rate could have also changed for others than closing out a credit card. If you’re charging more transactions to your credit card, and you’re carrying that balance, it will increase your credit utilization rate. Carrying a higher credit card balance can also cost you more money from interest charges.

It is recommended to keep your utilization ratio at or below 30% to help maintain a good credit score.

Derogatory marks

The information found on your credit report is what your credit score is calculated using. So if you have negative information on your credit report, it could drag your score down.

An example of a derogatory remark is if you have a car loan that goes into collections. The lender will typically send an account to collections if they are unable to collect a debt from you. Your car loan will be sent to a debt collector who will attempt to collect the debt. The credit bureau will receive that information and record it as a derogatory remark.

Some negative remarks can stay on your credit report for 7 to 10 years. A foreclosure and bankruptcy are examples of derogatory marks that stay on your report for long periods of times. The good news is that the impact of this negative mark will lesson with time.

Certain marks fell off report

Just as a negative mark like a bankruptcy will fall off your credit report with time, so will the positive ones. For example, if you had closed out a credit card ten years ago, that probably dropped your credit a bit at the time. However, the credit card account still stays on your credit report for ten years.

After that, it will be removed and so will the positive effects it had on your credit.

Missed payment

A late payment has the highest impact on your credit score. It makes up 35% of your FICO credit score. If a bill is 30 days past due, your creditor has the ability to report that late payment to the credit bureaus.

Typically, you will also get fined a late payment fee by the creditor as well. Having too many missed payments can quickly lead to poor credit.

To avoid a missed payment, enroll in autopay, or set up alerts/calendar reminders of bill dates. If you’re having trouble paying an account, don’t just accept that you’ll have a bad credit score. Reach out to the creditor to see if they have a repayment plan that works for your situation.

Credit limit reduced

When you lower the credit limit on a credit card account or a credit card issuer reduces it, this could also lower your credit score. This also increases your utilization ratio.

Since you want to keep your credit utilization rate at 30% or less, try not to ask for a lower credit limit or close an account if you see that it will affect this.

Sometimes a credit card issuer will lower your credit limit, which causes your utilization ratio to go up. If this happens, contact your issuer and ask them if they will raise your credit limit. If this doesn’t work, than work on lowering your account balance.

Loan paid off

If you’ve paid off an installment loan such as a student loan, your score may drop. Credit scoring calculations, as mentioned above, look at your credit mix.

So when you pay off a loan, it can have an affect, particularly if that was the only installment loan in your credit file. It’s still a good thing to reduce your debt so don’t take this as a bad thing.

Identity theft

Identify theft occurs when your personal information is compromised and used for ulterior purposes. A their might use the information to open up new accounts, increase a credit card balance, etc. A person could experience a missed payment from one of these new accounts that is added to their credit file.

The best offense when it comes to identity theft is a good defense. Use credit monitoring if it’s a service that’s offered by one of your financial relationships. Review your credit report from each credit reporting agency regularly to identify any accounts that you’re not aware of.

If you have found that you’re a victim of identity theft, immediately take action by contacting the issuer or lender about the fraudulent activity. You can also put a freeze on your credit file, so a credit check can’t be run and hard inquires won’t pile on.

When to worry about credit score drops

Seeing a drop in your credit score can feel distressing. But if you already have good credit, a few points lower is probably not going to affect you too much.

But if you have poor credit or have experienced a major event such as declaring bankruptcy or incurring a sizeable credit card balance, there could be reasons to be concerned. Your payment history and available credit will go a long way to helping you build good credit.

If you have a credit score of less than 680, you should take steps to improve your credit and consider credit repair. Also, if you have a situation like identity theft that happens, you should take steps to prevent further damage.

A potential way to improve your bad credit is to open a secured credit card. This type of credit card involves putting a down payment that acts as your credit line. As long as you maintain a positive payment history and keep your credit utilization ratio low, you could see improvement over the course of several months.

Common questions about credit scores dropping

If you’ve recently opened several credit cards that required a credit check and added multiple hard inquires to your credit profile, it could be easy to identify why your credit score dropped. But it’s not always so cut and dry. Here are some of the most common questions that people ask about a credit score drop.

How low is a bad credit score?

When considering the FICO Score, it’s considered fair or bad credit when your credit score is below 669. Bad credit is when it dips below 580, as you can see below. With poor credit, it makes it more difficult to get approved for loans and may also impact your interest rate.

Source: Forbes

Why is my credit score going down if I pay everything on time?

If you’re making on-time payments that are being reported to the credit bureau, your payment history is probably not the cause of a drop in your score. Look at the other factors that may cause a drop in your credit score that could be going on. For example, if you’re using up more of your available credit and revolving a balance, your credit utilization ratio could be going up.

Why does my credit score go down when I use my credit card?

If you’re not paying your balance in full each month, that’s adding to your utilization rate and leaving you with less available credit. So every time you use your credit, it’s adding onto your debit and lowering your credit score.

Does your credit score go down if you use your credit card too much?

If you are using your credit too much and not paying it in full each month then yes, it can go down.

If you are paying your Capital One credit card on-time and in full each month for example, you’re probably not going to affect your credit score negatively all that much. But your credit score looks at many different factors.

So to keep your good credit, you have to avoid activities like closing out old accounts, running a credit check when you don’t need credit, and other activies that are reported to the credit reporting agency that can affect it.

How long do derogatory marks stay on credit score?

It depends on the type of derogatory mark, but typically 7-10 years for most issues. Bankruptcy, collections, repossession, foreclosure, or missing payments will stay on your credit file for 7 years. Most credit cards charge a late fee when missing a payment, but legally need to give you 30 days to make a late payment before reporting it, which would then hurt your score and stay on record for 7 years.

Conclusion

There is not always a reason to panic when your credit score drops. Just be sure that you review what might have changed in the past month that might have affected it. Opening up a new credit card, for example, will result in a hard inquiry that will temporarily lower your credit score. To maintain a good credit score, make sure that you practice good credit habits. Utilize credit monitoring and free credit score access through a service like Credit Karma or if you have a Capital One card to keep on top of changes to your score. 

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