Why Did My Credit Score Drop and What Should I Do?

A credit score is a numerical representation, typically a three-digit number between 300 and 850, that assesses an individual’s creditworthiness. This score signals to lenders the likelihood of a borrower repaying a loan on time. Credit scores are generated from credit reports and used by lenders, credit card companies, and landlords to evaluate financial risk. Understanding the reasons behind a significant drop is important for maintaining financial health.

Common Factors That Lower Credit Scores

Late payments are a primary factor that can significantly impact a credit score. A payment reported 30 days or more past its due date can cause a credit score to drop and can remain on a credit report for up to seven years. The severity of the impact depends on how late the payment is, with longer delinquencies causing more substantial drops.

High credit utilization (the amount of revolving credit used compared to total available credit) is another common reason for a score decrease. Lenders view a high utilization ratio as an indicator of increased risk. Keeping credit card balances under 30% of the total available credit is recommended to maintain a healthy score.

New credit inquiries, often called “hard inquiries,” occur when you apply for new credit. Each hard inquiry can cause a small, temporary dip in your credit score, by fewer than five points. These inquiries remain on your credit report for up to two years, though their impact on your score lessens after 12 months.

Opening new credit accounts can also initially lower your credit score. New accounts decrease the average age of your credit accounts, and a longer credit history contributes positively to your score. While the immediate impact might be negative, responsible use of new credit over time can eventually benefit your score by improving your credit mix and utilization.

Closing old credit accounts can have a negative effect on a credit score. This action can reduce your total available credit, which may increase your credit utilization ratio if your balances remain the same. It can also shorten the average age of your credit history. These actions can negatively influence your score.

Public records, such as bankruptcies, foreclosures, or accounts sent to collections, have a significant negative impact on credit scores. These marks indicate an inability to meet financial obligations and can remain on a credit report for seven to ten years, making it challenging to obtain new credit.

Settling accounts for less than the full amount owed, often referred to as a “settlement,” can also damage your credit score. While it resolves the debt, it is reported as not being paid in full. This negative mark can remain on your credit report for a substantial period.

Identity theft or fraudulent activity can lead to a significant drop in a credit score. Thieves may open new accounts, make unauthorized purchases, or rack up debt in your name, leading to missed payments and high utilization that appear on your credit report.

Errors on credit reports, though not caused by consumer behavior, can similarly lower a score. Incorrect late payments, accounts that do not belong to you, or inaccurate account balances can all negatively affect your creditworthiness. These inaccuracies can occur due to data entry mistakes or misreporting by creditors.

How to Pinpoint Your Specific Score Drop Reason

To identify the reason for a credit score drop, begin by accessing your credit reports. Federal law allows you to obtain one free copy of your credit report every 12 months from each of the three major credit bureaus: Equifax, Experian, and TransUnion. The official website for these free reports is AnnualCreditReport.com. You can choose to request all three reports at once or space them out throughout the year for continuous monitoring.

Once you have your credit reports, review them for any changes or inaccuracies. Look for recent late payments, new accounts you did not open, increased balances on existing accounts, or collection accounts. It is important to check all three reports, as information may vary between bureaus. Comparing the timing of any negative events on your report with the timing of your score drop can help pinpoint the cause.

Credit monitoring services can assist in tracking changes to your credit profile. These services often provide real-time alerts for significant activity, such as new inquiries, opened accounts, or reported late payments. While some basic monitoring services are free, paid services may offer more comprehensive alerts and features, including dark web scanning for identity theft. Utilizing these services helps you quickly identify and respond to suspicious activity or negative reporting.

Actions to Take After a Credit Score Drop

If the drop is due to errors on your credit report, you have the right to dispute these inaccuracies with the credit bureaus and the company that provided the incorrect information. You should explain in writing what you believe is wrong, provide supporting documents, and send your dispute by certified mail, keeping copies for your records. The credit bureaus are required to investigate your dispute within 30 days.

For issues related to high credit utilization, reduce your credit card balances. Paying more than the minimum due each month can significantly lower your outstanding debt. Prioritizing high-interest debts first or using a debt snowball or avalanche method can help accelerate repayment. Consistently keeping your credit utilization below 30% is beneficial for your score.

If late or missed payments caused the score drop, contacting your creditors immediately is important. You can negotiate a payment plan or discuss options to bring your account current. Setting up payment reminders or enrolling in automatic payments can help prevent future delinquencies. While a late payment remains on your report for up to seven years, its negative impact diminishes over time, especially with consistent on-time payments going forward.

In cases of identity theft or fraud, immediate action is necessary. Report the theft to the Federal Trade Commission (FTC) at IdentityTheft.gov to receive a recovery plan. You should also place a fraud alert on your credit reports with one of the three major credit bureaus; that bureau will notify the other two. Consider implementing a credit freeze, which restricts access to your credit report, making it harder for identity thieves to open new accounts.

General advice for maintaining and improving credit after a drop includes consistently making all payments on time. Payment history is the most significant factor in credit scoring models. Maintaining a healthy mix of credit, such as revolving credit and installment loans, can positively influence your score over time.