Why Did My Credit Score Randomly Drop?

Credit scores influence financial life, impacting everything from loan approvals to interest rates. These three-digit numbers are dynamic and fluctuate based on reported financial activities. This article explains how credit scores are determined, explores common reasons for decreases, how to identify unexpected drops, and the actions to take afterward.

How Credit Scores Change

Credit scores, such as FICO Scores, are calculated using information from credit reports, with data grouped into five main categories. Payment history is the most significant factor, accounting for approximately 35% of a FICO Score, indicating whether past credit accounts were paid on time. Amounts owed, or credit utilization, makes up about 30%, reflecting the percentage of available credit being used. Lenders generally prefer that individuals use less than 30% of their total available credit.

The length of credit history contributes around 15% to a FICO Score, considering how long accounts have been established and their average age. New credit, including recent applications and opened accounts, accounts for about 10%. The credit mix, or the variety of credit accounts like credit cards, installment loans, and mortgages, makes up the remaining 10%, demonstrating an individual’s ability to manage different types of credit. Changes in any of these areas can cause credit scores to move.

Common Reasons for a Score Decrease

One frequent reason for a credit score to decrease is increased credit utilization. Even if payments are made on time, using a higher percentage of available credit can negatively impact scores because it suggests a higher reliance on borrowed funds. For instance, a credit utilization rate exceeding 30% can be viewed unfavorably by scoring models. This impact can be particularly noticeable if a high balance is reported to credit bureaus before it is paid down.

Applying for new loans or credit cards commonly leads to a temporary score reduction due to “hard inquiries.” A hard inquiry occurs when a lender checks an individual’s credit report after a credit application, and each inquiry can typically lower a FICO Score by fewer than five points. While hard inquiries usually remain on a credit report for two years, their impact generally lasts 12 months. Opening new accounts can also slightly lower the average age of an individual’s credit history, which may have a minor impact.

Closing old credit accounts can unintentionally harm a credit score by reducing total available credit and shortening the average length of credit history. A single payment 30 days or more past due can significantly damage a credit score, as payment history is a primary factor. Unpaid debts sent to collection agencies severely impact credit, potentially reducing scores by hundreds of points. Collection accounts remain on a credit report for up to seven years from the first missed payment that led to collection.

Detecting Unexpected Score Drops

Credit report errors are a common cause of unexpected credit score drops. These errors can include incorrect personal information, accounts that do not belong to the individual, or inaccurate payment statuses. Duplicate accounts or incorrect balances and credit limits can also negatively affect a score. Regularly reviewing credit reports helps identify these inaccuracies.

Identity theft and fraud can lead to sudden, significant score decreases if unauthorized accounts or fraudulent charges appear on a credit report. Warning signs include unrecognized bank or credit card transactions, unfamiliar inquiries on a credit report, unexpected bills, or calls from debt collectors for debts not owed. If an individual is an authorized user on someone else’s credit card, their financial mismanagement can also negatively affect the authorized user’s credit score.

To investigate an unexpected drop, individuals can access their free annual credit reports from Equifax, Experian, and TransUnion via AnnualCreditReport.com. When reviewing the reports, scrutinize new accounts, inquiries, late payments, or high balances that are unfamiliar. Credit monitoring services can also help by tracking changes to credit reports and alerting individuals to new accounts, hard inquiries, or significant score drops, which can signal potential fraud.

Steps After Identifying a Drop

If a score drop is due to credit report errors, dispute inaccuracies directly with the credit bureaus and the creditor that provided the incorrect information. Disputes can be submitted online, by phone, or by mail, and it is advisable to provide supporting documentation. The credit bureau typically has 30 days to investigate and correct the error.

In cases of identity theft or fraud, immediate action is necessary. Individuals should report the incident to the Federal Trade Commission (FTC) through IdentityTheft.gov. Placing a fraud alert on credit reports is a recommended step; this alerts creditors to take extra measures to verify identity before extending new credit. Fraud alerts do not impact credit scores. Additionally, consider placing a credit freeze to restrict access to credit reports, which can prevent new accounts from being opened in one’s name.

For legitimate but undesirable activity, such as high credit utilization or recent inquiries, improving the score involves consistent financial management. Paying down credit card balances to reduce utilization is highly effective, ideally keeping balances below 30% of available credit. Consistently making all payments on time is paramount, as payment history is the most impactful factor. Avoiding new credit applications for a period can allow hard inquiries to age and their impact to lessen.