Why Did My Credit Score Drop?

Credit scores have a big impact on your finances, and your credit score might often change behind the scenes based on fluctuations in your spending and borrowing. Credit scores measure the likelihood that you will repay a debt. Banks, lenders, and creditors use these scores to gauge the risk of lending to you. Lenders want to get their money back, with interest. So people with higher credit scores are believed to be more likely to repay the borrowed money. 

Understanding why credit scores drop or rise could help you save money on loan interest, qualify for better financial products, and improve your financial life in the long run. A higher credit score could help you get lower interest rates on loans. 

One of the most commonly used credit scores is the FICO Score, which ranges from 300 to 850 points. 

Here are the three lower FICO Score ranges and how they rate you as a borrower:

• Good: 670-739

• Fair: 580-669

• Poor: 300-579

Having a good credit score or an even higher score in the very good (740 to 799) or exceptional range (800 to 850), could help you get better deals on loans. 

A credit score drop, especially into the fair range or lower, could mean you’ll pay higher interest rates than you’d expected, or you might even get denied when you apply. Because credit scores are so valuable, keep an eye on yours and understand what’s happening in case your credit score drops. 

Everyone should monitor their credit score. Just like you want to know how much money is in your bank account, it’s good to know your credit score and keep track of any changes. Credit score monitoring isn’t just for people who need debt relief or who are trying to pay off debt. It’s a key part of your overall financial health. 

Freedom Debt Relief isn't a Credit Repair Organization and doesn't provide, or offer, services or advice to repair, modify, or improve your credit.

How to Find Out if Your Credit Score Drops

It’s pretty easy to keep an eye on your credit score so you can quickly find out if your credit score drops. A few of the best ways that most people can use to check their credit score without having to pay any fees are: 

Credit monitoring apps 

Credit monitoring apps make it easy to keep track of your credit score. You can usually sign up for credit monitoring apps for free. The app will ask your permission to access and track your credit information, and send you emails and other notifications. 

Popular credit monitoring apps include Credit Karma, Credit Sesame, and CreditWise by Capital One. Most credit monitoring apps will let you set up alerts so you can quickly find out if your credit score drops. All of these brands offer free basic accounts and premium services for a fee.

You might want to use more than one credit monitoring app, because different apps use different credit scores: FICO and VantageScores. That’s right: you have more than one credit score. You have multiple scores based on these different models. Your credit score could look different on different credit monitoring apps, and that’s fine.     

Credit card and bank accounts 

Some credit card issuers and banks also let you check your credit score for free when you’re logged into your account online. That makes it easier to watch for any changes from month to month. Keeping an eye on your credit score from your online banking app or credit card account might feel like the easiest, most comfortable way. If your credit score drops, you can review your account activity to explore whether something there might be affecting your score. 

Credit bureaus 

The major credit bureaus, Equifax, Experian, and TransUnion, all offer credit scores. All three let you look at your credit score for free. If you need more advanced access to your credit scores and more detailed credit reports, it might be worth signing up for the credit bureaus’ paid services. This isn’t necessary for most people. 

One of the most important reasons to monitor your credit score is to keep track of ongoing trends. Credit scores tend to fluctuate slightly over time. If you know your credit score, you can pay attention to the latest changes and note if it’s a big sudden drop that’s cause for concern or just a temporary dip. There are many moments when your credit score might go down—even without any unpaid bills or negative credit items. You might wonder, if my bills are paid on time, why did my credit score drop?

First, don’t worry. Your credit score could drop for many reasons, and many of them aren’t a sign of financial trouble. If you’re getting ready to apply for a loan, such as a debt consolidation loan, you’ll want your credit score to be as high as possible. It’s good to understand why your credit score might drop. 

When you rebuild your credit history after going through debt collections or a debt settlement program, you probably want to feel more in control of your credit score. Understanding the ups and downs of credit scores could help you stay motivated while you rebuild your credit. 

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Why Did My Credit Score Drop If Nothing Changed?

If you notice a sudden drop in your credit score even though nothing has changed, you might feel confused or discouraged. Don’t worry: this is normal. Even if your credit card debt is under control, you’re on top of payments, and you haven’t applied for any new loans, credit scores can still fluctuate. Every month, behind the scenes of the financial system, your creditors submit data about your borrowing and spending. 

This data goes to Experian, TransUnion, and Equifax, the three credit bureaus, also called credit reporting companies. 

In any given month, you might borrow slightly more money on your credit cards than last month. Or you might apply for a new account. Or an old account might age off your credit reports. The three credit bureaus constantly recalculate credit scores based on the available data today. 

Timing is important for your credit score, and it’s not always something you can control. Creditors report your information to the credit bureaus at different times throughout the month. If you paid down a credit card balance last month (reducing your credit utilization ratio), that new information might not show up on your credit report right away. The credit bureaus might still rate your credit score as lower than you think it should be. 

Sometimes there’s a lag between the actions you take to pay down credit card balances and when that positive information shows up on your credit report and in your credit score. There’s no guarantee for when any specific move will cause a visible improvement in your credit score. 

Credit is complex. Credit bureaus constantly update their calculations about your creditworthiness using a range of factors—and some of them may be beyond your control. You might think, “nothing changed, why did my credit score drop?” or “I paid off my credit card balance, why did my credit score drop?” 

Your credit score might drop because of some small detail you didn’t realize or forgot about. Some examples of small changes in your personal finances that might cause your credit score to drop. 

For example, if you paid off your car loan last month and it was your only installment loan, you might lose points in the credit mix category. The credit bureaus typically award credit score points if you can show that you have and use a variety of types of credit accounts. If you now only have credit cards, or if you now have no credit accounts at all, paying off that loan could, in fact, cause a drop in your score.

Your credit score doesn’t always change from month to month. And even though you can’t always control the exact timing or size of changes in your credit score, it’s good to know how credit scores work. This could help you be better prepared and make well-informed choices about your credit. 

If your credit score drops, these are the factors to look for. 

Payment history 

This is the most important part of a credit score. Making payments on time is the best way to build good credit. When you’re late with payments, it hurts your credit score. 

Making even one payment 30 days late could knock a noticeable number of points off your score. If you let that account get to 60 or 90 days late (or more), expect your score to nosedive.

Because payment history is such a big part of your credit score, you should avoid making late payments. If you can’t afford to make more than the minimum payment, try to make that payment on time. 

Amounts owed

Credit utilization ratio measures how your credit card balances compare to your credit limits. High balances typically drag down your credit score. Try to keep your credit utilization ratio low. It’s best not to use all your available credit limit, even though banks have offered it to you. People with the highest credit scores tend to have credit utilization of 10% or lower. 

When lenders notice your credit utilization ratio getting higher, they start to worry that you’re using too much of your available credit. They could view this as a sign that you’re becoming a riskier borrower, that you might be spending beyond your means or struggling to pay your bills. It might not seem fair, but that’s the way the credit score system works. Credit utilization ratio is the second most important part of your credit score, right after on-time payment history. 

To calculate your credit utilization ratio, divide your credit card balance by your credit limit. For example, let’s say you have a credit card with a $5,000 credit limit and a zero balance. $0 divided by $5,000 is zero. In this case, your credit utilization ratio is zero. 

One day, you go out and charge $4,000 worth of electronics. Now you have a $4,000 balance on the card with the $5,000 credit limit. Your credit utilization ratio is now 80% ($4,000 divided by $5,000 = 0.80) and your score is likely to drop. 

Over the next four months, you pay off your balance. Each month, the balance is lower than the month before. That's likely to have a positive effect on your credit and make your credit score go up incrementally.

Length of credit history

Length of credit history means how long you’ve been using credit. People with a long credit history have a proven track record of paying on time and not getting overextended on loans. Credit reporting companies like  stable, long-term usage of credit. 

Having a credit account that’s been open for a long time, such as a mortgage that you’ve been paying off for 10 years, could boost your credit score. Opening new accounts brings your average account age down.  

Credit reporting companies also look at the ages of your oldest and newest credit accounts. 

Types of accounts 

This is what’s known as credit mix. Having experience with different kinds of credit accounts is considered a good thing. 

For example, a student loan, a car loan, and a credit card.

Hard credit inquiry

Every time you apply for credit, you could lose a few points off your credit score. If you’re trying to rebuild credit, every point matters. 

Here are some of the most common reasons a credit score might fall.

Reason 1: You Missed a Payment Date

Late payments can put a big dent in your credit score. Try to avoid paying late, even if you can only afford the minimum, such as $40 on a credit card. If you’re coping with a loss of income or other financial stress, it might be tempting to skip a payment on your credit card or other loans. 

Some people might miss a payment because of miscommunication from the creditor or slow-arriving mail. Billing cycles can be tight. By the time you get around to opening the bill and sending a payment, you may have missed the deadline. 

Two quick ways to avoid missing payments are: 

• Sign up for electronic statements and online payments 

• Use automatic payments (at least for the minimum) so your bills get paid on time without any extra effort

Making payments electronically is faster and also has the advantage of allowing you to immediately confirm receipt. When you make electronic or automatic payments, be sure there’s enough money in your bank account to cover the payment. 

Reason 2: You Paid Off a Loan

This may be one of the most surprising reasons for a drop in your credit score. You’d think paying off a loan would improve your credit. After all, you now owe less money and you’ve proven that you pay your debts. 

Paying off a loan could make your credit score drop if it was your only installment loan. You get points for credit mix—having and using a variety of different kinds of credit accounts. If you close an installment loan account (even by paying it off), it no longer factors into your credit mix. If that was your only installment loan account, then you could lose points. 

This doesn’t mean you should stop paying off your loans. But be prepared for a slight decrease in your credit score if you don’t have similar accounts on your credit report. 

Reason 3: You Closed a Credit Account

Sometimes, closing a credit card account is the responsible thing to do. So why can it hurt your credit score? 

Closing a credit card account could affect your credit score in two ways: credit mix and your utilization ratio.

As with paying off a loan, if you close your only credit card, you might lose points on your credit mix.

Second, if you close a credit card account while you still have a balance on that card or any card, your utilization rate will go up. Higher utilization usually hurts your credit scores. As it goes up, you could lose points. As you pay down your balances, your score could rise. 

Reason 4: You Opened a New Credit Account

Opening a new credit account might hurt two aspects of your credit score. 

Every time you apply for credit, you could lose a few points from your credit score because applying for credit means a hard inquiry on your credit report. When you apply for a new loan or credit card or ask to raise the credit limit on your credit card, the bank or credit card company has to pull your credit report. Hard inquiries are required for private student loans and some federal student loans. Some landlords might also do a hard inquiry when reviewing your application for rental housing. 

Hard inquiries stay on your credit report for two years, but they only affect your credit score for one year. If you make too many credit applications too quickly, this could cause your credit to take a hit from too many hard inquiries. 

Creditors don’t like too many applications for credit in too short a time, because it could make you look like you’re desperate for cash—and that means you’re not likely to be as creditworthy. If you’re applying for lots of new credit cards or personal loans and getting turned down could hurt your credit score. Instead of new credit, you might need debt relief—find out how it works.

Here’s one fewer thing to worry about: You’re allowed to rate shop for mortgages, auto loans, and student loans. If you apply for several of these types of loans within 45 days, your credit score should treat it like only one hard inquiry, not several. This lets you compare rates and find the best loan for your needs without seeing your credit score drop. 

Along with the lower credit score that comes from a hard inquiry, opening a new credit account could also hurt your credit score. New credit also would hurt your length of credit by reducing both the average age of your accounts and because you’re adding a brand-new account. The exact amount of credit score drop will depend on your overall credit history and how many other credit accounts you have open. If you buy a car with a new auto loan or open a new credit card account with tempting rewards, don’t be surprised if your credit score drops a bit. 

Reason 5: You Were Removed As an Authorized User on an Account

If someone adds you as an authorized user to their credit card, that account is included in your credit record. Having your name taken off an account acts much the same as closing an account. It could increase your credit utilization rate by reducing the amount of credit you have available. It could also reduce the average age of your credit accounts.

Reason 6: Your Credit Limit Was Lowered

Credit card companies sometimes reduce credit limits. Your credit limit could be $2,000 today and $1,500 tomorrow. This could happen even if you’ve never had a problem making your payments on time. 

Having your credit limit lowered doesn’t always mean you did something wrong with your credit account. Sometimes the credit card company isn’t singling you out for being a risky borrower. They may just be reducing the total amount of credit that's being offered to its customers. 

If you have any balance on your credit cards, lowering your credit limit will increase your credit utilization rate. That’s one of the things that can hurt your credit score.

Reason 7: Your Credit Card Balance Increased

If your credit card balance goes up, your credit score might go down. It's best to keep balances low to avoid credit score drops. That’s because the bigger your credit utilization ratio, the bigger the possible hit to your credit score. 

Remember: your credit utilization ratio is your credit card balance divided by your credit limit. Credit utilization ratios are tracked by credit bureaus based on each individual card, and across all of your credit cards. 

For example, if you have only one credit card with a credit limit of $10,000 and your credit card balance is $2,500, this means your credit utilization ratio is 25%:

2,500 / 10,000 = 0.25

If you have three credit cards with three different credit limits and balances, here’s how your total combined credit utilization ratio would look: 

Even though one credit card has a slightly lower utilization ratio of 20%, the overall ratio for all credit cards is 38%. There’s no hard and fast rule for the definition of a good credit utilization ratio. Usually, people with the best credit scores tend to keep their credit utilization ratios at 10% or lower. A good target would be 30% or lower.

If you’ve recently used your credit card to pay for a big one-time expense (like a car repair or vacation) and your credit utilization ratio has shot up beyond its usual level, that’s okay. Credit utilization ratios are temporary, and they’re only based on the current month’s balance. If your balance goes up a lot for one month, your credit score might drop. But if you can pay off that higher balance quickly, your credit score might recover fast.

If you want to avoid taking a hit on your credit score due to higher credit card balances, try this strategy: make early payments on your credit card before the statement date (not just the actual due date. Paying down your balance earlier, before it gets reported to the credit bureaus, could keep your credit utilization low—and could help keep your credit score from dropping.  

Reason 8: There’s a Mistake on Your Credit Report

Every now and then, credit reporting companies make mistakes. For example, your credit report might have an account that doesn’t belong to you, an incorrect balance, or incorrectly recorded payment amounts. 

If your credit score drops suddenly for reasons you don’t understand, be sure to check your credit report. You can get a free credit report from all three credit bureaus once a week at AnnualCreditReport.com. 

Checking your credit report for mistakes is an important financial chore, even if your credit score is fine. Try to make time for it once or twice a year. 

Reason 9: Someone Else Used Your Card

If someone else is using your card, your credit score could drop without you doing anything. (Again, utilization.) 

This may be perfectly innocent if there’s another authorized user on your card. However, it could also be a sign that someone has stolen your account information and is charging things to your credit card. 

Financial fraud and identity theft are becoming all too common. Changes in your credit score can be the first warning sign that you’re a victim of fraud. You can sign up for credit monitoring that may alert you to fraud and other activity that affects your credit score. 

The credit bureaus will help you if you think someone is fraudulently trying to access your credit report and identity. Just contact any one of the three credit bureaus. It will contact the other two for you. Putting a fraud alert on your account means that a lender or creditor must take reasonable steps to confirm your identity if anyone (including you) tries to open an account in your name or make changes to an existing account. 

Reason 10: You’ve Gone Through a Major Financial Event

Some of the biggest credit score drops happen because of major financial hardships and serious life events. If you’ve suffered a serious illness or medical episode or gone through a long-term loss of income that has made it harder to pay your bills, your credit score will show the effects of this financial hardship. Two of the biggest negative events that cause credit scores to drop include bankruptcy and home foreclosure.  

Filing bankruptcy will stay on your credit report for several years: seven years for Chapter 13, and 10 years for Chapter 7. Bankruptcy could help you eliminate some eligible debts and restructure other debts. 

A home mortgage foreclosure will also stay on your credit report for seven years. Many mortgage lenders may not lend to you again if you have a foreclosure on your credit history. 

Even if you’ve suffered some extreme financial events, you can rebuild your credit and get back on a path to a brighter future. The negative impact on your credit score from a foreclosure or bankruptcy is usually most severe within the first two years of the event. Even though these events stay on your credit report for seven to 10 years, the damage to your credit score lessens over time. 

A foreclosure or bankruptcy doesn’t mean the end of your ability to borrow money or buy a home. Sometimes these negative events are necessary to get out of an impossible situation and move on with your life. You can recover from even the biggest credit score drops. And if you’re trying to decide between filing bankruptcy or using a debt settlement program, debt settlement usually hurts your credit score less than bankruptcy.  

Steps to Take if Your Credit Score Drops

If your credit score drops, the first thing you should do is check your credit report. Make sure to check with all three major credit reporting bureaus: Equifax, Experian, and TransUnion. The bureaus collect similar information, but your credit record could vary slightly from one to another. You’re allowed a free credit report each week from the three credit bureaus. Be sure to check your credit report from all three to try to identify why your credit score dropped. 

When you look at your credit reports, go through our list of reasons your credit score may have dropped. Once you’ve identified the reason, it’s easier to figure out what steps you should take to fix your credit.

If your FICO Score or VantageScore isn’t in the “good” or better range where you’d like it to be, here are a few quick tips for how to improve your credit score. 

Focus on the most important parts of your credit score 

Payment history and credit utilization are the two biggest components of your credit score, and typically you can control these. If you can only change two things about your credit score, prioritize these first. They’re most likely to give you the biggest improvements for the least amount of effort. 

Use payment reminders and automatic payments

On-time payments are important to your credit score, so don’t leave them to chance. Make them automatic and give yourself one less thing to do. Many banking apps and credit card apps will let you set up monthly automatic payments to your credit cards. You can also schedule payments in advance, set up alerts to let you know when payments are due, and use other useful tools.  

Get more precise about credit utilization 

How much money you’re borrowing from your credit cards each month is an important detail. Get familiar with your credit limits and do the mental math each month to understand what your credit utilization ratio might be. Remember: 30% or less is an ideal ratio to aim for. Try to charge a balance of $3,000 or less on a card with a $10,000 credit limit, or less than $4,000 across multiple cards with a combined limit of $12,000.  

Avoid applying for new credit 

Every time you apply for a new credit card or loan, your credit score gets hit with another hard inquiry. If you’re having trouble paying your bills without opening new credit accounts, this could be a sign that you need:

• A budget

• To increase your income 

• To cut your expenses 

• Other professional financial help

• Debt relief

If you’ve got too much credit card debt or you want to rebuild your credit after a negative financial event, applying for new credit isn’t the answer to your problems. 

Don’t worry too much about credit mix and credit age 

Credit mix (the different types of loans and credit accounts that you have open) and credit age (how long you’ve had your various credit accounts) only make up 25% of your credit score. Don’t focus too much on these. You don’t have to rush to open multiple types of loans to increase your credit mix. 

It’s okay if you don’t have a long-established credit history to give you a good credit age, especially when you’re younger. You can’t always control credit age. Some components of your credit score tend to naturally get better and stronger over time as you move through life and get more experience with different types of credit. Focus on the biggest pieces of the credit score puzzle you can achieve, like paying your bills on time and avoiding excessive credit usage.

A credit score drop is sometimes a sign of bigger financial problems ahead. If your credit score drops because you're struggling to pay your bills and falling behind on credit card debts, you might need credit card counseling or other serious help. 

But for most people, credit scores go up and down for lots of small reasons. If you’re wondering why your credit score dropped, the reason is often simple.  

People just like you are seeking debt relief in Kentucky and across the country. The first step is the most important one—explore your options.