Why Did My Credit Score Drop 60 Points?

A credit score represents financial reliability for lenders. A significant drop, like 60 points, signals an underlying cause. This article explores common reasons for such a reduction.

Changes in Payment History

One of the most impactful factors influencing credit scores is an individual’s payment history. Even a single late payment can significantly affect a score, with the severity increasing based on how overdue the payment becomes. Creditors generally report payments as late once they are 30, 60, or 90 or more days past their due date.

Payments a few days late may incur a fee but are usually not reported to credit bureaus if settled quickly. However, a payment 30 days past due and reported can cause a substantial score drop, sometimes 100 points or more, especially for those with strong credit. The negative effect compounds as payments become 60 or 90 days late.

Completely missed payments, which lead to an account being reported as delinquent, have a severe and lasting negative impact. Payment history constitutes a significant portion, typically 35%, of credit scoring models, making any negative marks in this area highly influential. These derogatory marks can remain on a credit report for up to seven years from the date of the original delinquency.

Credit Utilization and New Credit

The amount of credit used relative to the total available credit, known as credit utilization, is another major determinant of credit scores. This ratio is calculated by dividing your total outstanding balances by your total credit limits across all revolving accounts. Maintaining a high utilization ratio, particularly above 30%, can signal increased risk to lenders and lead to a significant score decrease. Maxing out credit cards or consistently carrying high balances can trigger a rapid decline in a score.

Credit utilization accounts for approximately 30% of a FICO Score. A lower utilization ratio, ideally below 10%, is viewed more favorably. Managing this ratio effectively is important because its impact on a credit score can be immediate.

Applying for new credit, such as loans or credit cards, results in a “hard inquiry” on a credit report. Each hard inquiry can cause a small, temporary dip in a credit score, typically by five points or less. While a single inquiry usually has a minimal effect, multiple hard inquiries within a short period, especially outside of rate shopping for mortgages or auto loans, can indicate higher risk and lead to a more noticeable score drop. These inquiries remain on a credit report for up to two years, though their impact on the score fades after 12 months.

Major Negative Events

Severe derogatory marks can cause an immediate decline in a credit score. Accounts sent to collections or charged off by the original creditor represent financial distress. A collection account means an unpaid debt has been transferred to a collection agency and can remain on a credit report for seven years from the original delinquency date. A charge-off occurs when a creditor deems a debt uncollectible and writes it off as a loss, typically after several months of missed payments.

Both collections and charge-offs negatively impact credit scores. While missed payments preceding a charge-off already damage a score, the charge-off itself further signals financial difficulty. These negative items can make it challenging to obtain new credit.

More extreme events, such as bankruptcy, foreclosure, or repossession, significantly damage a credit report. A foreclosure can lead to a score reduction of 100 points or more and remains on a report for seven years. Bankruptcy has an even more severe initial impact, potentially causing a drop of 130 to 200 points, and can remain on a credit report for seven to ten years depending on the type filed. These events signal an inability to manage financial obligations.

Less Common Influences

Sometimes, a credit score drop can be attributed to less frequent but still impactful factors. Identity theft or fraudulent activity can lead to unauthorized accounts or charges appearing on a credit report. If an identity thief opens accounts or makes purchases in an individual’s name, the resulting unpaid debts and high credit utilization can severely damage the credit score. Such fraudulent activity can also generate hard inquiries that were not authorized.

Errors on a credit report are another potential cause for a score decline. Inaccurate information, such as accounts that do not belong to the individual, incorrect payment statuses, or misreported balances, can negatively affect a score. Regularly checking credit reports for such inaccuracies and disputing them is an important step in maintaining credit health. Correcting these errors can lead to an improvement in the credit score.

Closing a credit account, particularly an older one with a high credit limit, can indirectly impact a score. While the account may remain on the credit report for up to ten years if closed in good standing, closing it reduces total available credit. This reduction can increase the credit utilization ratio on remaining cards, potentially leading to a score decrease if balances are not adjusted. Closing an old account can also shorten the average age of accounts, a factor in credit scoring models, though its effect is less direct for a sudden 60-point drop unless combined with other issues.