You’ve been diligently working on building your credit score for months or even years. So why did your credit score drop for no reason?
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Reasons your credit score could drop with no explanation
Your credit score is important. A good credit score can help you get approved for loans and credit cards, get a lower interest rate, and even rent an apartment. So, what can you do if your credit score drops for no reason? Let’s take a look at some possible explanations.
You missed a payment
If you have a credit card, a mortgage, a car loan or any other kind of loan, one way your credit score could drop is if you suddenly stop making payments. Depending on your payment history, your credit score could drop by anywhere from 60 to 110 points, according to FICO.
Your payment history makes up 35% of your FICO score, so even one missed payment can have a significant impact. And if you have a history of late or missed payments, your score could drop even more.
You opened a new credit account
If you recently opened a new credit account, that could be the reason your score dropped. While it’s not necessarily a bad thing to have a new account, it does add another level of risk for lenders. They’ll want to see how you handle this new debt before extending more credit to you. So, if you’re planning on applying for a loan in the near future, you may want to wait until after you’ve established a good history with your new account.
You closed an old credit account
One common reason your credit score could drop is if you close an old credit account. Although you might think this would help your credit score because you’re using less of your available credit, it can actually have the opposite effect.
When you close an account, it can decrease your “average age of accounts” which is a factor that goes into your credit score calculation. Additionally, it can also increase your “credit utilization ratio” which is another factor that impacts your credit score. Therefore, although it might not seem like it would have an effect, closing an old credit account could actually cause your credit score to drop.
You applied for a new credit card
A hard inquiry will lower your credit score. For most people, this won’t have a huge impact — a few points at most. But if you have a thin credit file, or you’re trying to improve your credit score from marginal to good or good to excellent, this could cause a bigger drop.
Reasons your credit score could drop with an explanation
A drop in your credit score can be alarming, but don’t worry. There are a number of reasons why your credit score could drop, and most of them are not cause for concern. In this article, we’ll explain some of the most common reasons for a sudden drop in your credit score.
You have a high credit utilization ratio
One reason your credit score might drop is if you have a high credit utilization ratio, which is the amount of debt you’re carrying divided by the amount of credit you have available. Ideally, you should keep your ratio below 30 percent. If it’s much higher than that, it could be one reason your score has gone down.
There are a few things you can do to improve your credit utilization ratio. One is to simply pay down your balances. Another is to ask for a credit limit increase from your card issuer. If you have a good history with the issuer, there’s a good chance they’ll agree to raise your limit, which will immediately lower your credit utilization ratio.
Of course, it’s also important to avoid adding new debt as you work on paying down what you already owe. If you can do that, you should see your credit score start to rise again in no time.
You have a lot of hard inquiries on your credit report
If you have applied for several new lines of credit in a short period of time, it will show up as multiple inquiries on your credit report. Too many inquiries can have a negative impact on your credit score, so try to limit the number of new applications you submit.
You have a low credit history
One common reason your credit score could drop is simply having a short credit history. If you just turned 18 and applied for your first credit card, or if you recently moved to the U.S., you might have a short credit history. The FICO scoring model rewarded people withlengthy credit histories, so a sudden drop in your score might be due to a change in the scoring criteria.
Your score could also drop if you have few accounts with activity. If you have an inactive account or two, that’s not enough to offset the positive impact of your other accounts. Try using your cards more often and make sure you keep track of your payments to keep your accounts in good standing.
How to improve your credit score
Your credit score is very important. It is used to determine whether or not you will be approved for loans, credit cards, and other financial products. A good credit score can save you a lot of money in interest and fees. A bad credit score can cost you thousands of dollars in higher interest rates and fees.
Make all your payments on time
One of the most important things you can do to improve your credit score is to make all your payments on time, every time. Payment history is the biggest factor in your credit score, accounting for 35% of your FICO® Score☉ .
If you have any late payments, get them resolved as soon as possible and be extra diligent in making all your payments on time going forward. You may also want to consider signing up for automatic bill pay or setting up calendar reminders to help you stay on track.
Keep your credit utilization ratio low
A key factor in determining your credit score is how much of your available credit you are using at any given time – this is known as your credit utilization ratio.
One way to keep your credit utilization ratio low is to avoid using too much of your available credit at any one time. Try to keep your balance below 30% of your credit limit, and pay off your balance in full each month if possible.
Another way to keep your credit utilization ratio low is to request a higher credit limit from your lender. This can be especially useful if you have a large outstanding balance that you are working to pay down.
Monitor your credit report for errors
Unfortunately, credit report errors are not uncommon. In fact, a study by the Federal Trade Commission found that one in four consumers had an error on their credit report. And while some of these errors may be harmless, others can seriously damage your credit score.
If you find an error on your credit report, it’s important to take steps to correct it as soon as possible. The first step is to contact the credit bureau directly and ask them to investigate the error. You should also dispute the error with the company that reported it to the credit bureau.
If you don’t take action to correct errors on your credit report, your credit score could suffer needlessly. So make sure you keep a close eye on your report and dispute any errors you find.
How to get your free credit report
You’re entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. Order online from annualcreditreport.com, the only authorized website for free credit reports, or call 1-877-322-8228. You will need to provide your name, address, social security number, and date of birth to verify your identity.
You are entitled to one free credit report from each of the three credit reporting bureaus every year. You can get your report by visiting AnnualCreditReport.com.
You will need to provide your name, address, Social Security number, and date of birth. You will also be asked some questions to verify your identity. Once you have provided all the necessary information, you will be able to access your credit report.
Your credit report will contain information on all of your current and past credit accounts, including your payment history and any derogatory marks (such as bankruptcies or foreclosures). It is important to review your credit report regularly to ensure accuracy and to catch any signs of identity theft or fraud.
Request your report from each of the three credit bureaus
If you’re worried about a drop in your credit score, one of the first things you should do is order your reports from all three credit bureaus. By law, you’re entitled to a free copy of your report from each bureau every 12 months. You can order them all at once, or space them out throughout the year.
If you find discrepancies on any of your reports, you can file a dispute with the bureau to have the error corrected. This could help improve your credit score.
You can also request your report if you’re planning on applying for a loan or other form of credit. This way, you can check for any errors that could hurt your chances of getting approved.
Review your reports for errors and dispute any inaccuracies
It’s important to regularly review your credit reports for errors or inaccuracies. You’re entitled to one free report from each credit bureau every 12 months. You can request yours by visiting AnnualCreditReport.com or by calling 1-877-322-8228. When you review your reports, look for:
Incorrect personal information, such as your name, address, Social Security number or date of birth
Incorrect account information, such as the type of account, the status of the account (open, closed, in collections), the credit limit or balance and the payment history
Inaccurate information about missed payments, late payments or other negative marks
Excluding positive information, such as on-time payments
Reporting an account more than once
If you find any errors on your report, you can dispute them with the credit bureau.