Why Is My Credit Score Dropping? Key Reasons & How to Fix It
Demystify changes in your credit score. Understand the underlying factors influencing its movement and discover practical strategies to regain control.
A credit score is a numerical representation of your creditworthiness, providing lenders with an indication of your likelihood to repay borrowed money. This three-digit number, ranging from 300 to 850, influences various aspects of your financial life. A higher score can lead to more favorable interest rates on loans, easier approval for mortgages, and better terms on rental agreements or insurance policies. This article explains the factors that affect your score and outlines the steps you can take to address and improve it.
Understanding Your Credit Score
Your credit score is calculated using information from your credit reports, compiled by major credit bureaus. While specific formulas vary between scoring models like FICO and VantageScore, they consider similar categories of financial behavior.
Payment history is the most significant factor, accounting for approximately 35% of your score, reflecting whether you have paid past credit accounts on time. Credit utilization, the amount of revolving credit you use compared to your total available credit, makes up about 30% of your score. The length of your credit history contributes around 15%, while new credit accounts for about 10%. The remaining 10% considers your credit mix, the variety of credit accounts you have.
Primary Reasons for a Credit Score Decline
A common reason for a credit score to drop is a late or missed payment. Even a single payment reported as 30 days past due can significantly lower your score, with the impact increasing for payments that are 60 or 90 days late.
High credit utilization is another frequent cause of score reduction. If you use a large portion of your available credit, maintaining balances close to your credit limits signals a higher risk to lenders. Keeping your credit utilization ratio below 30% is advised to avoid a negative impact.
Applying for new credit can also lead to a temporary dip in your score. Each time you apply for a new loan or credit card, a “hard inquiry” is placed on your credit report. Multiple hard inquiries in a short period can suggest higher risk and cause a noticeable score decrease.
Closing a credit account, particularly an older one, might unexpectedly lower your score. This action can reduce your total available credit, increasing your credit utilization ratio. It also shortens the average age of your credit accounts, negatively affecting the length of your credit history.
More severe events, such as accounts sent to collections or charged off by a creditor, have a substantial negative impact. A collection account means a debt was severely delinquent and sold to an agency. A charge-off occurs when a creditor writes off a debt as uncollectible. These negative marks, along with major financial difficulties like bankruptcy or foreclosure, can remain on your report for up to seven years. Identity theft or fraudulent activity can also result in unauthorized charges or new accounts, causing unexpected score drops.
Identifying and Addressing Score Drops
Upon noticing a decline in your credit score, the immediate step is to review your credit reports. You are entitled to a free copy from each of the three major credit bureaus—Experian, Equifax, and TransUnion—once every 12 months. These reports can be accessed through AnnualCreditReport.com, the only authorized website for these free reports.
When reviewing your credit report, examine all sections for accuracy. Look closely at account names, numbers, payment histories, and credit limits. Pay attention to any unrecognized accounts or unauthorized inquiries, as these could indicate fraudulent activity or identity theft.
If you find errors or suspicious activity, you have the right to dispute the inaccurate information. Initiate a dispute directly with the credit bureau that reported the error and, if applicable, also with the creditor. The credit bureau has 30 days to investigate your dispute and respond, removing any information found to be inaccurate or unverifiable. Maintaining records of all communications and documents related to your dispute is important.
Strategies to Improve Your Credit Score
Consistently making on-time payments is the most powerful action you can take to improve your credit score. Payment history is the largest component, so establishing a pattern of timely payments will gradually rebuild positive credit. Setting up automatic payments for your bills can help ensure you never miss a due date.
Reducing your credit card balances is another effective strategy. By paying down revolving debt, you lower your credit utilization ratio, which can lead to a significant score increase. Aim to keep your total credit card balances well below 30% of your combined credit limits.
Avoiding unnecessary new credit applications can help stabilize your score. Each hard inquiry can cause a small, temporary drop, and opening multiple new accounts in a short period can signal higher risk to lenders. Only apply for new credit when truly needed and after careful consideration.
Maintaining a responsible mix of credit types, such as installment loans and revolving credit, can benefit your score over time. This shows a broader range of creditworthiness. Only take on new credit if it aligns with your financial needs and you can manage the payments.
Becoming an authorized user on someone else’s well-managed credit card account can also help build your credit history. Provided the primary account holder maintains a good payment record, the account’s positive payment history and low utilization can appear on your credit report, potentially boosting your score.