How to Find Out Why Your Credit Score Dropped

A credit score represents an individual’s creditworthiness, influencing access to loans, credit cards, and housing. A sudden decline signals a potential issue with one’s financial standing. Understanding the reason for such a drop is the initial step toward restoring financial health.

Accessing Your Credit Reports

The first step to investigate a credit score drop is to obtain copies of your credit reports. Federal law mandates a free copy of your credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once every 12 months. The official source for these reports is AnnualCreditReport.com, which provides a centralized portal to access reports from all three agencies.

These reports detail credit history, including personal identifying information, credit accounts, and public records. Credit accounts list various types of credit (e.g., credit cards, mortgages, auto loans, student loans), showing original amounts, current balances, and payment status. The reports also document payment history, indicating whether payments have been made on time or if any delinquencies have occurred.

Credit reports contain information about credit limits, highest balances, and current balances owed. They list inquiries, records of businesses accessing your credit report when you apply for new credit. Public records (e.g., bankruptcies, foreclosures) are included and can significantly impact a score. Reviewing each section helps identify unfamiliar accounts, incorrect late payment notations, high balances, or excessive recent inquiries that might explain a score decrease.

Common Factors Leading to Credit Score Decreases

Missed or late payments are a primary reason for a credit score decline. Payment history is the most influential factor in credit scoring models, accounting for approximately 35% of a FICO score. A payment reported as 30 days or more past due can significantly lower a credit score; the impact increases with the delinquency period.

Increased credit utilization (the amount of credit used compared to total available credit) contributes to score reductions. Maintaining high balances on revolving credit accounts, such as credit cards, can negatively affect your score. Credit scoring models generally favor utilization rates below 30% to demonstrate responsible credit management.

Applying for new credit can also lead to a temporary dip in your credit score due to “hard inquiries.” When a lender checks your credit report for a new credit application, a hard inquiry is recorded, which can slightly reduce your score for up to 12 months. Multiple hard inquiries within a short timeframe can signal higher risk to lenders.

Opening several new credit accounts simultaneously can lower your score. While new credit can eventually build a positive payment history, a sudden influx of new accounts reduces the average age of your credit history, a factor in credit scoring. A longer credit history with positive activity generally contributes to a higher score.

Public records, such as bankruptcies, foreclosures, or tax liens, have a severe and long-lasting negative impact on credit scores. These events indicate significant financial distress and can remain on a credit report for up to seven to ten years, making it challenging to obtain new credit.

Identity theft or fraudulent activity on existing accounts can also cause a score drop if new unauthorized accounts are opened or existing accounts are misused, leading to missed payments or high balances. Regular monitoring of credit reports helps in early detection of such issues.

Closing older, established credit accounts can sometimes inadvertently lower a score. These accounts contribute to the length of your credit history and the overall available credit, and their closure can increase your credit utilization ratio if you continue to carry balances on other cards.

Addressing and Correcting Discrepancies

Once discrepancies are identified on your credit reports, the next step is to dispute them with the respective credit bureau. Each of the three major credit bureaus provides online dispute portals, or you can submit disputes via mail. When disputing, clearly identify the item, explain its inaccuracy, and provide supporting documentation (e.g., payment records, account statements, police reports for identity theft).

Upon receiving a dispute, the credit bureau is required by law to investigate the claim within 30 days (or 45 days if you provide additional information). The bureau will contact the creditor or information provider about the disputed item. If the investigation confirms the information is inaccurate, the bureau must correct or remove the item from your report and notify you of the outcome.

Directly contacting the creditor or financial institution that furnished incorrect information can also be beneficial. Providing details of the error and supporting documentation can lead to a quicker resolution. Even if a direct dispute with the creditor is successful, it is advisable to confirm the correction appears on your credit reports from all three bureaus. Following up ensures your credit report accurately reflects your financial history and helps rectify any score decreases.