Why Did My Credit Score Drop?

Credit scores keep changing all the time. Today you’ll see a score, and tomorrow a different one. But sometimes, your credit score can drop suddenly within a matter of days. If you’re one of them and have no idea why that happened, then this article is for you. Here, we will explain a few factors that can sink your credit score.

Can a Credit Score Drop?

A credit score, usually a number between 300 and 850, reveals your financial health and creditworthiness. Banks and other financial institutions rely on this metric to decide how careful you are about your finances. A good score, which is above 650, means you’re doing good. Anything below the number signals there are a few issues.

A credit score is dynamic. That means it keeps on changing from time to time. Credit unions track your spending habits, debts, balance and calculate this number. Therefore, depending upon your usage, the score keeps on changing.

There is also a possibility that your credit score might drop within a short period. If that’s the case, usually more than one tracking metrics are responsible for this drop. When that happens, you must learn why the credit score dropped in the first place. That’s our topic of discussion for the next section.

Reasons For Your Credit Score Drop

As mentioned earlier, multiple factors contribute to a credit score drop. As a user, you must be aware of these to make sense of what must have caused the drop. Some of the common reasons for a credit score drop are:

Late and/or Missed Payments

The biggest factor that impacts your credit score is missed payments. When you take out a loan or use a credit card, you must pay back the amount within a particular date. If missed for whatever reasons, this will be seen as negligence by the credit union. Therefore, they will slash your credit rating.

For a good credit score, payment history is key. For FICO Score, this accounts for 35% of the total rating. So, if you’ve missed a big installment, then your credit score can drop by 15-20% or even more.

The time frame is usually 30 days from the day you’ve used the credit. If it’s past 30 days, then your bank will report this delinquency to one or more credit unions. If you pass 60 or 90 days’ time period, then the impact will be even greater.

So if you see a sudden credit score drop, you need to check if you’ve missed a payment schedule.

You Applied for a Big Loan/Mortgage

Each time you apply for a bank or lender loan, it sends out an inquiry to the credit bureaus. Such an inquiry impacts your credit score negatively. But not all inquiries impact the same way.

There are two types of inquiries: soft and hard. Soft inquiries are made by the lender to check your credit score or pre-approve you for a loan offer. These do not impact your credit score.

Hard inquiries are those that are made by the lenders as part of their review process when checking the eligibility of your loan. These types of inquiries can influence your credit score.

The drop in credit score is compensated as you pay your installments. Upon completion, you’ll probably have a higher score than what was there previously, provided you pay your installments on time.

You’re Using Your Credit Card Too Frequently

Credit card companies encourage using a credit card for your shopping needs. The deals on offer and the flexibility of buy-now-pay-later may look irresistible, but you should refrain from spending your credits too much, too often.

In this way, you’re risking credit utilization, which is an informal way of saying your credit account balance might be too high compared to the credit limit. As a safety measure, credit card companies advise you not to exceed 30% of your available credit limit. So if you’re awarded a limit of $10,000, you shouldn’t be spending more than $3,000 too frequently.

With lower utilization, credit unions mean that you’re a responsible borrower. Consequently, your credit score goes up.

Therefore, if you’ve made a big-ticket purchase lately using your credit card, then your credit score would have dipped.

Your Bank Lowered Your Credit Limit

Banks lower credit limits when they sense that a user is not responsible for his finances. So if you’re spending at a higher rate, they will lower your credit spending depending on their calculation. This information goes to the credit unions too. They see that your bank has lowered your credit limit, and thus they reduce your credit score accordingly.

Lowering credit limits also impacts the credit utilization ratio. You’ll have to lower your spending likewise. But in case your credit score was lowered, but you still went ahead with a big-ticket purchase, expect your credit score to dip.

You Closed Your Credit Account

Many people think of closing their credit card when they don’t use it too often. But you might decide against it when you know that this can impact your credit score.

When you close one of your credit accounts, your total utilization ratio contracts. Also, this can reduce the length of your credit history. Both of these factors negatively affect your credit score. Please note that the length of your credit history contributes 15% of your FICO score. Thus, closing it early will mean your FICO credit score can reduce by as much as 15%.

Until your credit card comes with a high annual fee, you shouldn’t be closing your credit account. Also, when you decide to close it, make sure you have zero debt across all of your credit cards.

You Filed for Bankruptcy or Foreclosure

 If you’ve filed for bankruptcy or foreclosure, then this will heavily impact your credit score. The credit unions will get to know that you’ll not be able to make repayments, hence will prevent you from borrowing any money in the first place.

Apart from a lower credit score, this will also make you ineligible for other types of borrowings. Even certain landlords might not offer you their home.

If you experienced a drop in your credit score recently, then any of the above scenarios will probably explain the cause.

But a drop in credit score is often due to a series of events. You applied for a loan and got it but missed on your repayments. In another case, you might be using your card too often, and then your credit card issuer slashed your credit limit. All these factors will significantly drop your credit score.

Reporting Error

Finally, there’s also a chance that there was inaccurate information passed onto the credit unions from the banks. These can be typo errors too. So if 10 is wrongly typed as 100 in your loan case, then this will impact your credit score. In such cases, you need the help of a credit repair specialist.

Conclusion

The bottom line is to maintain a healthy spending habit to ensure that your credit score doesn’t drop. Check out our other articles on credit score for more information.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

See author's posts