How to Find Out Why Your Credit Score Dropped

A decline in your credit score can be a source of concern, often signaling changes in your financial standing. A credit score, a numerical representation of your creditworthiness, influences various aspects of your financial life, from loan approvals to interest rates. When your score drops, investigating the underlying causes becomes a primary step in addressing the issue and regaining stability. This process involves a systematic review of your financial records to pinpoint specific events or inaccuracies that may have led to the decrease.

Accessing Your Credit Reports

The first step in understanding a credit score decrease involves reviewing your credit reports. Federal law allows you to obtain a free copy of your credit report from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. The official source for these reports is AnnualCreditReport.com, which allows you to request all three reports at once or stagger your requests.

You can request your reports online, by phone at 1-877-322-8228, or by mail using the Annual Credit Report Request Form. It is advisable to obtain reports from all three bureaus, as not all creditors report information to every agency, meaning the content of each report may differ.

Understanding the Sections of Your Credit Report

After obtaining your credit reports, familiarity with their structure and content is beneficial for a thorough review. While each credit bureau may present information with slight variations, all reports contain similar categories of data. These sections provide a detailed snapshot of your financial history and obligations.

Credit reports begin with personal identifying information, including your name, addresses, date of birth, and Social Security number. The credit accounts section details your credit history, listing revolving accounts like credit cards and installment loans such as mortgages or auto loans. For each account, you will find information such as the opening date, credit limit or original loan amount, current balance, and payment history.

Other sections cover public records, which can include bankruptcies, foreclosures, or tax liens. Collection accounts, detailing debts that have gone to collection agencies, are also listed. The inquiries section records every instance where your credit report has been accessed, including “hard inquiries” from credit applications and “soft inquiries” that do not affect your score.

Identifying Changes That Affect Scores

With your credit reports in hand and an understanding of their structure, the next step involves systematically identifying specific changes or new entries that could explain a score drop. The goal is to compare current report data with previous reports or your financial records to spot discrepancies or new derogatory information.

One significant area to scrutinize is the presence of new derogatory marks. Late payments are a common reason for score reductions, and your report will indicate if payments were 30, 60, or 90 or more days past due. Even a single late payment can substantially impact your score, especially with an otherwise strong credit history. New collection accounts or public records, such as bankruptcies or foreclosures, also represent severe negative entries that can significantly lower scores.

Another factor to investigate is increased credit utilization, which refers to the amount of revolving credit you are using compared to your total available credit. A high utilization ratio, generally above 30% of your available credit, suggests a heavier reliance on credit and can negatively affect your score. Review your credit card balances and limits to determine if your utilization has increased.

Additionally, look for new hard inquiries on your report, which occur when you apply for new credit. While a single inquiry might have a minor, temporary impact, multiple inquiries in a short period can signal higher risk to lenders and further reduce your score.

Finally, review your accounts for any unexpected closures or unfamiliar activity. The closure of an older, well-maintained account can sometimes affect your score by reducing your overall available credit and shortening your credit history. Conversely, the appearance of accounts or inquiries you do not recognize could indicate identity theft or fraudulent activity.

Disputing Inaccuracies and Errors

Once you have identified specific inaccuracies or errors on your credit report, the next step is to formally dispute these items with the credit bureaus. This process is your right under federal law and can help correct misinformation that may be negatively affecting your score. You can initiate a dispute online, by mail, or by phone with each of the three major credit bureaus: Equifax, Experian, and TransUnion.

When submitting a dispute, clearly explain what information you believe is inaccurate and why. Include copies of any supporting documentation, such as payment confirmations, account statements, or police reports if fraud is suspected. Keeping detailed records of all correspondence, including dates and copies of documents sent and received, is important for your reference. Send any mailed disputes via certified mail with a return receipt to confirm delivery.

Upon receiving your dispute, the credit bureau is required to investigate the claim, typically within 30 days. This investigation involves contacting the data furnisher, such as a bank or credit card company, to verify the accuracy of the disputed information. If the investigation confirms an inaccuracy, the bureau must update your credit report and notify you of the outcome, usually within five business days of completing the investigation. Correcting these errors can lead to an updated credit report and potentially an improvement in your credit score.