Why Would My Credit Score Drop 20 Points?
Learn what common financial activities can cause a 20-point credit score change. Understand your credit profile's movements.
A credit score provides a numerical representation of an individual’s creditworthiness, influencing access to financial products like loans and credit cards, and often affecting interest rates. This three-digit number is dynamic, subject to fluctuations based on financial activities. A 20-point decrease, while noticeable, represents a common adjustment within credit scoring models. Such a change is a result of routine financial behaviors and is often temporary. Understanding these factors can help individuals maintain a healthy credit profile.
Changes in Payment Behavior
Payment history holds significant weight in credit scoring models, reflecting reliability in meeting financial obligations. Even a single payment 30 days past its due date can lead to a notable reduction in a credit score. The impact varies, with more recent late payments causing a greater score decline. These negative marks remain on a credit report for up to seven years, though their influence diminishes over time.
The severity of the score reduction also depends on the account type; a late payment on a credit card or mortgage loan can have a substantial effect. Missing multiple payments or allowing an account to become 60 or 90 days past due will trigger increasingly severe score drops. Consistently making payments on time is the most direct way to build and maintain a strong payment history. Establishing automatic payments for recurring bills can help prevent oversights and safeguard a positive payment record.
Fluctuations in Credit Usage
Credit utilization, the amount of revolving credit an individual uses compared to their total available revolving credit, significantly impacts credit scores. An increase in reported balances, even if paid in full before the next statement cycle, can temporarily lower a score. This is because credit bureaus receive balance information at a specific point in the billing cycle, not necessarily after a payment has been made. For instance, if a credit card with a $10,000 limit reports a $4,000 balance, utilization is 40%, which is higher than recommended.
Lenders prefer a credit utilization ratio below 30% across all revolving accounts. Exceeding this threshold, even for a short period, signals increased risk to scoring models, triggering a score decrease. For example, if total available credit is $20,000 and reported balances rise from $3,000 (15% utilization) to $8,000 (40% utilization), a score drop is probable. Reducing reported balances by making payments before the statement closing date can mitigate this effect and help restore a higher score.
Recent Credit Applications
Applying for new credit can also contribute to a credit score reduction due to “hard inquiries” on a credit report. A hard inquiry occurs when a lender requests a credit report to evaluate an application for new credit, such as a mortgage, auto loan, or new credit card. Each hard inquiry can cause a small, temporary dip in a credit score by a few points. These inquiries remain on a credit report for two years, though their impact on the score lessens after the first few months.
Multiple hard inquiries in a short period, especially for different types of credit, can signal to lenders that an individual might be taking on too much debt or is experiencing financial distress. However, credit scoring models account for “rate shopping,” where multiple inquiries for the same type of loan (like a mortgage or auto loan) within a specific timeframe are treated as a single inquiry. Opening new accounts also reduces the average age of all credit accounts, another factor considered in credit scoring, which can contribute to a minor score adjustment.
Errors on Your Credit Report
Inaccuracies on a credit report can be the root cause of an unexpected score decrease. Such errors might include accounts that do not belong to the individual, incorrect reporting of late payments, or accounts that have been closed but are still listed as open. These discrepancies can arise from data entry mistakes, misidentification, or, in more severe cases, identity theft. A fraudulent account opened in an individual’s name, for instance, could accrue debt and report negative payment history, directly impacting the score.
The Fair Credit Reporting Act (FCRA) provides individuals with the right to obtain a free credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once every 12 months. Regularly reviewing these reports allows for timely identification of any suspicious activity or incorrect information. If an error is found, individuals can dispute it directly with the credit bureau and the information provider. The bureau is required to investigate the disputed information within 30 days and correct or remove any inaccurate data.