Credit scores are central to your financial health, influencing everything from loan approvals to interest rates and even job opportunities. A sudden drop in your score can be frustrating and worrying, especially if you don’t immediately know the reason behind it. Many factors can impact your credit score, and understanding these can empower you to take action to improve or stabilize it.
Below, we’ll explore 12 of the most common reasons why credit scores drop, from missed payments to unexpected changes in your credit report. By understanding these reasons and learning ways to address them, you’ll be better equipped to manage your credit score and maintain financial health.
1. Missed or Late Payments
Payment history is the most significant factor in your credit score, making up around 35% of it. A single missed or late payment can lead to a noticeable drop in your score. The severity of the impact depends on how late the payment is—30, 60, or 90 days past due—and the number of missed payments. Even a minor delay of 30 days can result in a drop of up to 110 points, depending on your credit profile. Additionally, missed payments remain on your credit report for seven years, meaning that their impact, though it diminishes over time, can be long-lasting.
How to Address It: Setting up automatic payments or reminders can help ensure you don’t miss due dates. If you do miss a payment, paying it as soon as possible can prevent the situation from worsening. Communicating with your creditor may help avoid a report of late payment if you catch it early.
2. Increased Credit Card Balances
Credit utilization—the ratio of your outstanding credit card balance to your credit limit—is a key factor in your credit score. High credit utilization can make you appear as a higher risk to lenders, as it suggests you may be over-relying on credit. Ideally, your credit utilization should stay below 30% to avoid a negative impact on your score.
For example, if you have a credit limit of $10,000 and you’re using $8,000 of it, your utilization rate is 80%, which can substantially drop your score. A high utilization rate can also affect your ability to secure additional credit or loans, as lenders prefer low-risk borrowers with available credit.
How to Address It: Paying down your balance before the statement date helps reduce the reported balance on your credit report. Additionally, requesting a credit limit increase can help lower your utilization ratio, but avoid making new charges that could offset the benefit.
3. Closing a Credit Card Account
Closing a credit card account might seem beneficial, especially if it’s an account you rarely use, but it can have unintended consequences on your credit score. When you close an account, you reduce your total available credit, which increases your overall credit utilization ratio if you have balances on other accounts. Closing an account also shortens your credit history length if the account is one of your oldest.
For example, if you have two cards with a combined limit of $10,000 and close one with a $5,000 limit, your available credit is halved. This affects the utilization rate and could reduce your score, especially if your remaining balance remains high.
How to Address It: Instead of closing accounts, consider keeping them open with minimal or no balance. If you’re concerned about fees, inquire about downgrading to a no-fee card to maintain the positive credit benefits without additional costs.
4. New Hard Inquiries from Credit Applications
Each time you apply for new credit, the lender performs a hard inquiry on your credit report. Hard inquiries are requests to check your credit report, and each one may slightly lower your score. Typically, each inquiry only drops your score by a few points, but if you accumulate multiple inquiries within a short period, the impact can be more noticeable.
Hard inquiries remain on your report for up to two years, though their effect on your score diminishes over time. Frequent credit applications can signal to lenders that you’re in financial distress, especially if you’re applying for multiple forms of credit.
How to Address It: Try to limit applications for new credit unless necessary. If you’re shopping around for a loan, complete all applications within a short period (14-45 days) to count as a single inquiry in certain scoring models, helping to minimize impact.
5. Paying Off a Loan
Paying off a loan can sometimes lead to an unexpected drop in your credit score. This happens because paying off an installment loan, like a car loan or mortgage, reduces the diversity of your credit mix. Credit scoring models prefer a mix of credit types, including both revolving credit (like credit cards) and installment loans (like mortgages or auto loans).
When you pay off a loan, especially if it’s your only installment loan, it can reduce the diversity of your credit, potentially lowering your score. However, this drop is usually minor and short-lived compared to the benefits of having one less debt obligation.
How to Address It: After paying off a loan, consider using other forms of credit responsibly to maintain a varied credit mix. For example, a credit-builder loan or a small personal loan can contribute to a more diversified credit profile.
6. Errors on Your Credit Report
Errors on your credit report can harm your credit score and create unnecessary complications in your financial profile. Common errors include duplicate accounts, incorrect balances, or inaccurate negative information, such as delinquencies that don’t belong to you. These errors may occur due to creditor mistakes or reporting inaccuracies.
If not corrected, these errors can lower your credit score and potentially affect your ability to secure loans or credit cards. Regularly checking your credit report is crucial to identifying and disputing these errors before they cause long-term damage.
How to Address It: Request a free annual report from each major credit bureau at AnnualCreditReport.com. If you find inaccuracies, file a dispute with the bureau and provide evidence supporting your claim. Correcting errors can quickly boost your score, depending on the severity of the mistake.
7. Identity Theft or Fraudulent Accounts
Identity theft or fraudulent accounts can have a devastating impact on your credit score. If someone opens accounts or makes charges in your name, these actions can lead to high balances, missed payments, and delinquent accounts—all of which significantly harm your score.
Detecting identity theft early can minimize its impact, but if it goes unnoticed, the fraudulent activity can damage your score for years. Repairing credit after identity theft is often time-consuming, as it involves reporting the fraud and working with credit bureaus and creditors.
How to Address It: Contact your creditors and the credit bureaus immediately to freeze affected accounts. Report the theft to the Federal Trade Commission (FTC) at IdentityTheft.gov and file a police report. Following these steps can help contain the damage and start the recovery process.
8. Not Enough Credit Mix
Credit scoring models reward a healthy mix of credit types, such as revolving credit (credit cards) and installment loans (car loans or mortgages). If your credit profile lacks diversity, it may limit your score potential. Lenders prefer to see responsible use of multiple credit types, as it demonstrates financial versatility.
For example, if you only have credit card accounts, your lack of credit diversity might prevent your score from reaching its full potential, even if you maintain low balances and make timely payments.
How to Address It: Consider adding a different type of credit to your profile, like a secured credit card or a credit-builder loan. Diversifying your credit mix responsibly can lead to gradual score improvements.
9. Recent Delinquencies or Collections
Accounts that go into delinquency or collections have a severe impact on credit scores. Delinquencies occur when payments are overdue by 30, 60, 90 days, or longer. If payments remain unpaid, creditors may sell the debt to a collection agency, adding a collection account to your report.
Both delinquencies and collections are major derogatory marks on your report, which can stay for up to seven years. They also reduce your chances of securing favorable credit terms and may limit access to new credit.
How to Address It: If possible, work out a payment plan with the creditor to bring the account current. In some cases, paying off the collection or settling the debt can help reduce the negative impact. Always request that the collection agency reports the account as “paid in full” or removes the account if possible.
10. Decreased Credit Limits
When a creditor lowers your credit limit, your credit utilization ratio increases if you carry a balance on that card. For instance, if your credit limit decreases from $10,000 to $5,000, but your balance stays at $4,000, your utilization rate doubles, potentially reducing your score.
Creditors may lower limits due to various factors, including changes in your payment history or a general reduction in your credit activity.
How to Address It: If your credit limit decreases, consider paying down your balance to reduce your utilization ratio. Additionally, reach out to the creditor to discuss restoring your previous limit or request increases on other cards to offset the reduction.
11. High Loan Balances
High loan balances on installment loans, like auto or personal loans, can impact your credit score. Lenders view high balances as a sign of high debt, potentially lowering your score, especially if the balance is close to the original loan amount. High loan balances also increase your debt-to-income ratio, which can impact loan approvals.
As the loan balance decreases relative to the original amount, the impact on your score becomes less severe.
How to Address It: Try to make extra payments on your loan to reduce the balance faster. Reducing high balances not only improves your credit profile but also saves on interest in the long run.
12. Bankruptcy or Major Derogatory Events
Bankruptcy, foreclosures, repossessions, and other major derogatory events have the most severe impact on your credit score. These events indicate that you were unable to fulfill significant financial obligations, which lenders view as a substantial risk. Depending on the type, these events can stay on your report for seven to ten years, affecting your ability to secure credit, housing, or employment.
While the impact of such events lessens over time, they are initially detrimental to your credit score and financial options.
How to Address It: Rebuilding after a major derogatory event requires patience and effort. Start with the basics: make timely payments, keep balances low, and consider secured credit products. Over time, responsible credit behavior will help you recover from these events.
Conclusion
Credit score drops can be caused by a variety of factors, from missed payments and high balances to unexpected credit report errors or even identity theft. Understanding the reasons behind a score decline is the first step in regaining control of your credit. Whether the cause is within your control or requires dispute resolution, taking proactive steps can help stabilize or restore your score.
For those needing extra support, Credit Repair of Florida offers services to help identify and address credit issues effectively. With the right strategies and assistance, you can overcome credit setbacks and work toward a stronger financial future.
