Why Would My Credit Score Drop 40 Points?

Credit scores are dynamic numerical summaries that reflect an individual’s creditworthiness. These scores are a significant component of personal finance, influencing access to loans, credit cards, housing, and even some employment opportunities. Understanding the factors that contribute to these scores is important for managing personal finances effectively, especially when experiencing a notable decrease, such as a 40-point drop.

Core Components of Your Credit Score

Credit scoring models, like FICO and VantageScore, analyze information from your credit reports to generate a three-digit number. These models typically consider five primary factors when calculating a score, each holding a different weight in determining the overall score.

Payment history is a primary determinant, reflecting whether bills are paid on time. This category accounts for a large portion of a credit score because it indicates a borrower’s reliability. Amounts owed, also known as credit utilization, is another significant factor, measuring the percentage of available credit currently being used. Lenders prefer to see low credit utilization, as it suggests a borrower is not overextended.

The length of credit history considers how long credit accounts have been open and their average age. A longer credit history with responsible usage demonstrates financial stability. New credit, which includes recent applications for credit, can temporarily impact a score. The credit mix, or the variety of credit accounts held (such as credit cards, installment loans, and mortgages), also plays a role. It shows a borrower’s ability to manage different types of credit responsibly.

Events That Lower Your Score

A noticeable reduction in your credit score, such as 40 points, often stems from specific financial events that negatively impact its core components. Understanding these events can help identify the cause of a score drop. These occurrences directly affect the calculations performed by credit scoring models.

One of the most impactful events is a late or missed payment. Creditors typically report payments as late only when they are 30 days or more past due. A single 30-day late payment can cause a significant drop, particularly for individuals with higher credit scores, and this negative mark can remain on credit reports for up to seven years. Payments that are 60 or 90 days late generally have an even more severe effect on a score.

High credit utilization is another common cause for a score decrease. This occurs when you use a large percentage of your available credit, especially on revolving accounts like credit cards. Financial experts generally recommend keeping your total credit utilization ratio below 30% across all credit cards. Exceeding this threshold can indicate a higher credit risk to lenders, leading to a score reduction.

Applying for new credit can also lead to a minor, temporary dip in your score due to a “hard inquiry.” A hard inquiry occurs when a lender checks your credit report after you apply for a loan or credit card. While a single hard inquiry usually results in a small score reduction, typically fewer than five points, multiple inquiries in a short period can amplify this effect. Hard inquiries can remain on your credit report for up to two years, though their impact on your score usually diminishes after 12 months.

Closing old credit accounts can inadvertently lower your score, particularly if they are long-standing accounts. Closing an old account reduces your total available credit, which can increase your credit utilization ratio if you carry balances on other cards. It also shortens the average age of your credit history, a factor that lenders view favorably.

Finally, public records and collection accounts can severely damage a credit score. Events such as bankruptcies, foreclosures, or accounts sent to collections are significant negative marks. A bankruptcy filing, for instance, can cause a substantial score drop, potentially hundreds of points, and remains on a credit report for seven to ten years depending on the type of bankruptcy. These events signal a significant financial distress to credit scoring models.

Obtaining and Examining Your Credit Report

Understanding the reason for a credit score drop requires examining your credit reports. These reports contain detailed information about your credit history, including payment records, current debts, and inquiries. Reviewing these documents helps identify any discrepancies or negative entries.

You can obtain a free copy of your credit report from each of the three major nationwide credit bureaus: Equifax, Experian, and TransUnion. AnnualCreditReport.com is the official website for these free reports. You can request a report from each bureau once every 12 months, and weekly free reports have been permanently extended through this site since October 2023.

Once you have your credit reports, review each section for any changes or unfamiliar entries. Look for recent late payments. Check the balances and credit limits on your revolving accounts to assess if your credit utilization has increased. Review the “new accounts” or “inquiries” section for any credit applications you did not initiate. Search for any public records, such as bankruptcies or collection accounts, that might have been recently added.

Disputing Credit Report Errors

If your credit report examination reveals inaccuracies, you have the right to dispute these errors. The Fair Credit Reporting Act (FCRA) outlines the process for consumers to correct inaccurate information. Initiating a dispute helps ensure your credit report accurately reflects your financial standing.

To begin a dispute, contact the credit bureau reporting the incorrect information. You can submit disputes online through the bureau’s website, by mail, or by phone. When submitting a dispute, clearly identify the specific inaccurate item on your report. Include any supporting documentation, such as payment confirmations or account statements.

The credit bureau is required to investigate your dispute within 30 days of receiving it. The bureau will forward your information to the data furnisher for verification. If the information is found to be inaccurate or cannot be verified, it must be corrected or removed from your credit report. You will be notified of the investigation’s results within five business days of its completion and receive an updated copy of your report.