Why Did My Credit Score Drop? Common Reasons Explained

Credit scores reflect an individual’s creditworthiness, playing a significant role in various financial aspects of life. Ranging from 300 to 850, these scores help lenders assess risk for loans, credit cards, and rentals. While credit scores reflect financial behavior, they are not static and can fluctuate. A sudden drop can be concerning, but understanding the causes helps address them.

Common Reasons for a Credit Score Drop

A late or missed payment is a major cause of score decline. Creditors typically report payments as late once they are 30 days past the due date, and even a single instance can significantly harm a score, especially for individuals with an otherwise strong credit history. The impact worsens with longer delays, such as 60 or 90 days past due. Severely delinquent accounts may go to collections or be charged off, causing damage that can remain on a credit report for up to seven years.

Increased credit utilization also reduces scores. This refers to the amount of revolving credit used compared to total available credit. For example, a $5,000 balance on a $10,000 limit means 50% utilization. A ratio above 30% is seen as higher risk and negatively affects scores. Maxing out credit cards or carrying high balances substantially increases this ratio, leading to a considerable score drop.

Applying for new credit can temporarily lower a score due to a “hard inquiry.” When a lender checks a credit report for an application, it creates a hard inquiry, which typically shaves a few points off. While a single inquiry has minor impact, multiple inquiries in a short timeframe, especially for different credit types, signal increased risk and cause a noticeable dip. However, models often treat multiple inquiries for specific loans (like mortgages or auto loans) within 14 to 45 days as a single inquiry.

Closing old credit accounts can decrease your score. This reduces overall available credit, increasing your credit utilization ratio if balances remain. Closing an older account also shortens your credit history length, a factor in scoring models. A longer history shows responsible management, so reducing its average age can have an adverse effect.

Public records or derogatory marks on a credit report signify serious financial distress and severely impact scores. These include bankruptcies, foreclosures, tax liens, or civil judgments. A bankruptcy can remain on a credit report for seven to ten years, hindering credit access. Such negative entries indicate high risk to lenders, leading to substantial and prolonged score reductions.

Identity theft or fraudulent activity can cause an unexpected credit score drop. Unauthorized accounts or charges can appear on a credit report. These can quickly increase reported debt, create new hard inquiries, or show missed payments, all contributing to a lowered score.

Errors on a credit report can also lead to score decreases. Inaccuracies might include incorrect late payments, misreported balances, or accounts not belonging to you. These mistakes can falsely inflate credit utilization, erroneously report missed payments, or misrepresent credit history. Identifying and disputing such errors is important for an accurate credit profile.

Investigating Your Credit Score Change

When your credit score drops, first obtain and review your credit reports. Federal law grants free weekly reports from Equifax, Experian, and TransUnion via AnnualCreditReport.com. Reviewing reports from all three bureaus is advisable, as information may vary.

Upon receiving reports, thoroughly examine them for recent changes or discrepancies. Look for:
New credit accounts you did not open, indicating identity theft.
Newly reported late or missed payments.
Increases in balances on credit cards or loans.
New hard inquiries from recent credit applications.
Closed accounts, as their closure affects your credit.
Public records, like bankruptcies or tax liens, for accuracy.

Many credit card companies and financial institutions offer free credit scores and basic monitoring services. While these tools provide a quick overview, they lack the detailed account-level information found in full credit reports. Use them with a full report review for a comprehensive understanding.

If inaccuracies are found, dispute them directly with the credit bureaus. The Fair Credit Reporting Act (FCRA) mandates bureaus investigate disputed information within 30 days. The process involves submitting a written explanation of the error with supporting documentation to the specific bureau. Also contact the company that provided the incorrect information, as they must correct errors.

Understanding Credit Score Components

Credit scores, like FICO or VantageScore, are calculated from categories of information in your credit report. These categories are weighted differently, with some factors having a more significant impact. Understanding these components explains why financial actions change your score.

Payment history is the most influential factor, typically 35% of a FICO Score. It assesses consistent on-time payments for all credit accounts. A strong record shows financial responsibility, while late or missed payments signal increased risk, reducing your score. Longer, consistent timely payments have a more positive effect.

Amounts owed, or credit utilization, is another significant component, about 30% of a FICO Score. This factor considers the total debt across revolving credit accounts relative to total available credit. Maintaining low balances and a utilization ratio below 30% indicates effective credit management. High utilization suggests greater reliance on borrowed funds and negatively impacts the score.

The length of credit history contributes about 15% of a FICO Score. This component evaluates the age of your oldest account, newest account, and the average age of all accounts. A longer credit history, especially one showing responsible usage over many years, generally results in a higher score. It provides lenders more data to assess long-term financial behavior and indicates stability.

New credit, representing recent applications and newly opened accounts, accounts for about 10% of a FICO Score. While applying for new credit can slightly lower a score due to hard inquiries, this factor also considers the number of new accounts opened and time since the last new account. Rapidly opening multiple new accounts can be viewed as higher risk, potentially decreasing your score.

Finally, credit mix, or the variety of credit accounts managed, makes up about 10% of a FICO Score. This includes revolving credit (like credit cards) and installment loans (like mortgages or auto loans). Demonstrating responsible management of different credit types can positively influence your score, showing versatility in handling financial obligations.