Why Would My Credit Score Drop Unexpectedly?

A credit score serves as a numerical representation of an individual’s creditworthiness, providing lenders with an assessment of the risk associated with extending credit. These scores are not static; rather, they are dynamic and can fluctuate based on various financial activities and reporting. Understanding the factors that influence these changes is important for maintaining financial health and accessing favorable credit terms.

Missed Payments and Defaults

Payment history stands as a primary factor in determining credit scores. Even a single late payment can negatively impact a score, with the severity of the drop often depending on how late the payment is. Payments reported 30, 60, or 90 days past due have an increasingly detrimental effect. The more recent and severe the late payment, the greater its impact on the credit score.

When accounts go into collections or are charged off, the negative impact on a credit score becomes substantial. A collection account indicates that a creditor has given up on collecting a debt and has sold it to a third-party collection agency. Similarly, a charge-off means the original creditor has written off the debt as a loss. Both of these events are reported to credit bureaus and typically remain on a credit report for seven years from the date of the original delinquency. Even if a collection account is paid, it can still remain on the credit report for the full seven-year period, though its impact may lessen. Consistently making on-time payments is crucial for maintaining a strong credit score.

Credit Usage and New Account Activity

Credit utilization, which is the amount of credit you are currently using compared to your total available credit, plays a significant role in credit scoring. A high credit utilization ratio can cause a credit score to drop, even if all payments are made on time. Lenders generally prefer to see a low utilization, with a common guideline suggesting keeping balances below 30% of available credit limits.

Applying for new credit typically results in a “hard inquiry” on a credit report. This occurs when a lender checks your credit history as part of a loan or credit card application. A single hard inquiry usually causes a small, temporary dip in a credit score.

Opening multiple new credit accounts in a short period can be viewed as a higher risk by credit scoring models, potentially leading to a more noticeable score drop. Conversely, closing an old, established credit account can also inadvertently affect a credit score, particularly if it reduces your total available credit. This action can increase your credit utilization ratio if you carry balances on other cards, thereby negatively impacting your score.

Significant Negative Financial Events

Major financial events can lead to severe and long-lasting negative impacts on credit scores. Bankruptcy, for instance, signals a serious inability to manage debt and can remain on a credit report for seven to ten years, depending on the type filed. The score drop from bankruptcy can be substantial, potentially ranging from 100 to over 200 points, especially for individuals with previously good credit.

Foreclosure, which occurs when a lender reclaims a property due to missed mortgage payments, also severely damages credit. A foreclosure entry stays on a credit report for seven years from the date of the first missed payment that led to it. The impact on a credit score can be significant, with drops of 100 points or more being common. Repossessions, where an asset like a car is taken back by a lender due to non-payment, similarly result in substantial credit score drops and remain on reports for up to seven years.

Historically, civil judgments were reported on credit reports and could significantly lower scores. However, due to changes implemented in 2017, civil judgments generally no longer appear on credit reports and therefore do not directly impact credit scores. While the judgment itself may not be reported, the underlying unpaid debts that led to the judgment will still be on the credit report and can negatively affect the score.

Errors and Fraud on Your Credit Report

Not all credit score drops are a direct result of an individual’s financial actions; sometimes, inaccuracies or fraudulent activity can be the cause. Errors on a credit report, such as incorrect late payments, accounts that do not belong to you, or inaccurate balances, can negatively impact a credit score. These errors can stem from misreporting by creditors or data entry mistakes at the credit bureaus.

Identity theft and fraud represent another significant external factor that can cause a credit score to plummet without the individual’s knowledge. If a thief opens new credit accounts in your name or makes unauthorized charges on existing accounts, the resulting delinquent payments or high utilization will appear on your credit report.

It is crucial to regularly review credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. Federal law allows consumers to obtain a free credit report from each of these bureaus annually. If errors or suspicious activity are found, they should be disputed directly with the credit bureau and the company that reported the information. Reporting identity theft to the Federal Trade Commission and placing fraud alerts or freezes on credit reports can help mitigate further damage.