How to Know Why Your Credit Score Dropped

A credit score is a three-digit number, typically ranging from 300 to 850, that represents an individual’s credit risk and their likelihood of repaying debts on time. Lenders and creditors use this score as a significant factor when evaluating applications for loans, credit cards, and even interest rates. A higher score often leads to more favorable terms, while a lower score can limit access to financial products or result in higher costs. Credit scores fluctuate as they are dynamic measurements based on continuously updated credit information. Understanding the reasons behind a drop in your credit score is important for maintaining financial health, and this article aims to guide you through the process of identifying why your score may have decreased.

Initial Actions to Identify the Cause

When you observe a drop in your credit score, the immediate and most important action is to obtain copies of your credit reports. These reports contain the detailed history used to calculate your score. Federal law grants you a free copy of your credit report annually from each of the three major credit bureaus: Equifax, Experian, and TransUnion.

Access these free reports at AnnualCreditReport.com. You can request all three reports at once or space out requests to monitor your credit more frequently. Review reports from all three bureaus, as information can vary since not all creditors report to every bureau.

Accessing your reports online typically provides immediate access after identity verification. You can also request them by phone or mail, though delivery may take up to 15 days. Carefully examining each report is a key step in identifying the specific event or change that led to your score decrease.

Common Factors That Lower Credit Scores

Many factors can decrease your credit score, each weighted differently. Understanding these influences helps identify the cause of a score drop.

Payment history is the most significant factor, accounting for about 35% of a FICO score. A single late payment, especially if 30 days or more past due, can substantially lower your score. More severe or frequent delinquencies (e.g., 60 or 90 days late) have a greater negative impact. These negative marks can remain on your credit report for up to seven years, though their influence diminishes over time.

Credit utilization is another significant factor, representing the amount of revolving credit used compared to your total available credit. This factor typically accounts for about 30% of your FICO score. A high utilization ratio, generally above 30%, indicates higher reliance on borrowed funds and negatively affects your score. Maxing out credit cards or carrying high balances often decreases your score.

New credit applications can temporarily lower your score. When you apply for new credit, such as a loan or credit card, a “hard inquiry” is placed on your credit report. Each hard inquiry can cause a small, temporary drop of a few points and remains on your report for up to two years, though its impact usually lasts for about 12 months. Multiple hard inquiries in a short period can suggest higher risk to lenders, leading to a more significant cumulative impact.

Closing old credit accounts can negatively affect your score, especially long-standing accounts. While account history can remain on your report for up to 10 years, closing an account can reduce total available credit, increasing your credit utilization ratio. It can also shorten the average length of your credit history, another factor in credit scoring.

Public records, such as bankruptcies, can significantly impact your credit score. A bankruptcy filing can remain on your credit report for seven to ten years, causing a significant score drop, potentially hundreds of points. Bankruptcy is generally the only public record that appears on current credit reports from the major bureaus.

Identity theft or fraud can lead to unexpected negative entries on your credit report. If a thief opens new accounts in your name or makes unauthorized charges, these activities can result in hard inquiries, increased credit utilization, or missed payments, all of which can damage your credit score. Monitoring your credit report for unfamiliar accounts or activity helps protect against this impact.

Interpreting Your Credit Report

After obtaining your credit reports from the three major bureaus, review each section to identify changes or entries aligning with common factors that cause score drops. While layouts vary, all reports contain similar key sections.

Examine the “Accounts” or “Tradelines” section, detailing your credit cards, loans, and other accounts. Look for new late payment marks (30, 60, or 90 days past due), as these are significant negative indicators. Check reported balances and credit limits for revolving accounts. A sudden increase in reported balance relative to your credit limit, or a decrease in your credit limit, can signal an increased credit utilization ratio, even if spending habits haven’t changed.

The “Inquiries” section lists every credit report request. Look for any hard inquiries you don’t recognize, as these could indicate unauthorized attempts to open new credit, a red flag for identity theft. Note if inquiry dates coincide with your score drop.

Review the “Public Records” section for any recent entries such as bankruptcies. Any unexpected bankruptcy filing would severely impact your score. Check the “Personal Information” section for inaccuracies, such as incorrect addresses or misspelled names, which could be signs of identity theft. Identifying these details is crucial for understanding your score decrease.

Addressing Identified Inaccuracies

If your credit reports reveal inaccuracies, such as an incorrect late payment, unfamiliar account, or erroneous public record, you have the right to dispute them. The Fair Credit Reporting Act (FCRA) mandates investigation and correction of inaccuracies by credit reporting companies and furnishers.

Initiate disputes directly with each of the three major credit bureaus (Equifax, Experian, and TransUnion) online, by mail, or by phone. When filing, clearly explain the error, providing specific details like the account number and nature of the error. Include copies of supporting documentation, such as payment records or police reports for identity theft, but keep original documents.

The credit bureaus are generally required to investigate your dispute within 30 days, or up to 45 days if you provide additional information. If the investigation confirms inaccuracy, the credit bureau must correct or remove it. Sending your dispute via certified mail with a return receipt provides proof of delivery and helps track the process.