How to Figure Out Why Your Credit Score Dropped

A credit score numerically represents an individual’s creditworthiness, impacting various financial aspects. Many individuals are concerned when their credit score unexpectedly drops, as this can have immediate and long-term implications for their financial standing. This article guides readers through investigating a credit score drop and outlines steps to address identified issues.

Accessing Your Credit Reports

Investigating a credit score drop begins with obtaining your credit reports, which provide information credit scores are based on. The official source for free credit reports from the three major consumer reporting agencies—Experian, Equifax, and TransUnion—is AnnualCreditReport.com.

When reviewing these reports, pay close attention to key areas for potential score decline. Examine all active accounts, verifying account numbers, credit limits, and current balances to ensure accuracy. Carefully scrutinize the payment history section for each account, noting any reported late payments, missed payments, or accounts that have gone into default.

Public records, such as bankruptcies, foreclosures, or tax liens, can damage your score and should be verified for accuracy. Additionally, check for collection accounts (debts sold to a collection agency). Finally, review the inquiries section, distinguishing between “hard inquiries” (affect your score) and “soft inquiries” (do not).

Understanding How Scores are Calculated

Credit scores are complex calculations that weigh various aspects of your financial behavior. They generally consider similar categories of information.

Payment history is the most influential factor, assessing whether payments have been made on time. Late or missed payments negatively impact a score.

Amounts owed, also known as credit utilization, is another significant component. This refers to the proportion of your available credit currently used; higher utilization rates indicate increased risk and often lead to lower scores.

The length of your credit history considers how long your credit accounts have been open. A longer history with positive payment behavior tends to result in a higher score.

New credit reflects recent applications and newly opened accounts. While applying for new credit can be necessary, opening multiple accounts in a short period can be viewed as risky behavior.

Finally, credit mix evaluates the different types of credit accounts you have, such as revolving credit (credit cards) and installment loans (mortgages, auto loans). A diverse and responsibly managed credit mix can positively influence your score.

Common Factors That Lower Scores

Credit score declines often stem from changes in how scores are calculated. One of the most impactful factors is missed or late payments; even a single occurrence can significantly reduce a score. Payments reported 30, 60, or 90 days past their due date indicate increased risk and are heavily weighted against your payment history.

Another frequent cause of score drops is an increase in credit utilization, which occurs when you use a higher percentage of your available credit. Lenders prefer to see utilization rates below 30%, as exceeding this threshold can signal financial distress and lead to a score decrease. Maintaining low balances relative to your credit limits helps this aspect of your score.

Applying for new credit can also result in a temporary dip in your score due to hard inquiries. Each time you apply for a loan or credit card, a hard inquiry is placed on your credit report, which can slightly lower your score for a few months. While one or two inquiries may not have a major impact, numerous inquiries in a short period can suggest a higher risk profile. Closing old credit accounts, especially those with a long history, can shorten your average credit history and reduce total available credit, increasing utilization and lowering your score.

New public records, such as bankruptcies or foreclosures, can damage your score. While some older public record types like civil judgments and tax liens may no longer be included in credit reports, bankruptcies and foreclosures remain detrimental. Identity theft or fraudulent activity, where unauthorized accounts are opened or charges are made in your name, can lead to a score drop. Errors on your credit reports, such as incorrect balances, duplicate accounts, or misreported payment statuses, can also negatively affect your score.

Steps to Address Score Drops

After identifying reasons for a credit score drop, take actionable steps to address issues. If you discover inaccuracies on your credit report, such as incorrect personal information, accounts that are not yours, or misreported payment statuses, disputing these errors is a primary course of action. You can initiate a dispute directly with the credit bureau (Experian, Equifax, or TransUnion) that reported the information, typically through their online dispute portals, by mail, or by phone. The credit bureau generally has 30 to 45 days to investigate and respond.

For issues related to high credit utilization, the most effective strategy involves reducing your outstanding balances. Paying down credit card debt helps. Even making multiple smaller payments throughout the billing cycle instead of one large payment at the end can help keep your reported utilization lower. This approach directly addresses the “amounts owed” category, which heavily influences your score.

Addressing late payments requires immediate action to bring accounts current, as ongoing delinquencies will continue to suppress your score. For older late payments, while they remain on your report for up to seven years, maintaining a consistent record of on-time payments going forward will gradually mitigate their negative impact. In some cases, if a late payment was an isolated incident, you might consider sending a “goodwill letter” to the creditor requesting its removal, though success is not guaranteed.

If identity theft is suspected as the cause of your score drop, take swift protective measures. This includes placing a fraud alert or credit freeze on your credit reports with all three major credit bureaus to prevent new accounts from being opened in your name. Contacting creditors for any fraudulent accounts or charges helps have them removed. Beyond addressing specific issues, adopting general healthy credit management habits, such as setting payment reminders and regularly monitoring your credit, can help prevent future score drops and foster long-term financial health.