Sometimes it can seem like your credit score drops out of the blue, even if you’re all caught up on your bills. This can be discouraging if you’re working toward improving your credit. But it may not be a cause for concern. It’s normal for credit scores to fluctuate and rise and fall as you check your credit report and track your credit history.
A credit report holds a person's financial history, encompassing credit scores, payment habits, and credit limits. It reflects credit utilization ratios and the diversity of credit accounts. Credit bureaus compile these reports, vital for lenders assessing creditworthiness. Payment history influences credit scores and determines access to increased credit limits. Maintaining a healthy credit history involves managing credit card accounts responsibly, impacting credit utilization.
A favorable credit utilization ratio enhances scores and can influence how your credit score rises and falls. Regularly checking credit reports ensures accuracy and identifies areas for improvement. Understanding these components aids in cultivating a robust credit profile, fostering better financial opportunities and favorable terms on loans or credit cards. So what could be the reason why you see your credit score dropping? Let's take a look and see what a credit score drop can mean for you!
What to do if you notice your credit score has dropped
If your credit score has gone down, it ’s important to take a close look at your credit report. It’s normal for your credit score to go up and down slightly from month to month, as your credit balances change. But if the drop is significant, you’ll want to check your report for any warning signs concerning your available credit, credit utilization rate, evidence of identity theft, payment history, and other things that might indicate why a credit score drop might be something you see.
Credit scores reflect individuals' creditworthiness based on their credit history, payment records, and credit utilization. Credit reports from bureaus detail this data, influencing the total credit limit accessible. Maintaining a healthy credit mix impacts a good credit score positively. However, high credit card debt or exceeding the credit limit can affect this score adversely. Identity theft poses a risk, impacting payment history and credit utilization ratio. Revolving credit, like a credit card account, demands prudent usage to avoid exceeding limits. Regular monitoring of credit reports aids in identifying irregularities, essential in safeguarding against identity theft and maintaining a robust financial profile.
Here are some of the most common reasons why credit scores drop at times suddenly and seemingly unexpectedly.
You missed a credit card payment
No matter how meticulous you are, it’s easy to overlook a credit card due date. Maybe you recently switched banks and forgot to move your account information. Or maybe you mixed up the due dates and messed up your on time payments.
Whatever the reason, missed payments have the biggest impact on your credit score, accounting for 35% of this number. So if you think your credit score is decreasing for no reason, pull up your credit report to make sure you haven’t overlooked a payment for a credit account.
You increased your credit card balance
Even if your balance is always paid in full each month, if you charge too high a percentage to your credit card, you might see your credit score slip slightly. Your credit utilization — how much credit you use versus your line of credit — accounts for 30% of your credit score. Overuse can impact credit scores and cause your credit scores to drop quickly when that information hits the credit bureaus.
Charging more than 30% of your credit line can cause your score to drop. That’s because lenders generally view using too much of your credit line as a red flag that you’re facing financial troubles. Be sure to calculate your credit utilization for each credit card so you don’t overspend. This information will be on your credit reports and is definitely something a credit card issuer and lender will consider.
You applied for a new line of credit
Did you recently apply for a new credit card, loan, or line of credit? Even if you were approved, the hard inquiry that shows up on your credit report when a lender pulls your credit can temporarily ding your credit score. Inquiries into your credit make up 10% of your credit score — so while they’re not a huge percentage, too many inquiries at once might cause a noticeable dip in your score.
You closed your credit card
If you have a credit card you haven’t used in a while, you may think that closing it is your best option. But closing a credit card account can have a significant impact on your credit score. When you close a credit card, your credit utilization ratio may go up. That’s because you now have access to a lower total line of credit, bringing your overall ratio of balances to available credit up.
Closing a credit card can also impact your credit mix, particularly if it’s your only card. And if it’s one of your oldest credit cards it will change your length of credit history, which can also drag your score down.
Experts generally recommend keeping credit cards open for this reason, unless they’re tempting you to overspend or you’re paying an annual fee that no longer makes sense.
You paid off a loan or closed a loan
Paying off a loan is a huge accomplishment. And while you may think erasing your debt would reflect positively on your credit report, it might cause it to decrease in the short-term. Paying off a loan won’t impact your credit utilization ratio since it’s a type of installment financing option, rather than a revolving line of credit. But it can impact other factors that make up your credit score.
If the loan was on your credit account for many years or even decades, it can impact your length of credit, which accounts for 15% of your credit score. It will also impact your credit card account limit and credit card balance as reported with the credit bureaus.
There's an error in the report
Sometimes a lender reports your activity wrong. You might spot a missing payment for your main credit card, but have proof that you paid the bill on time. If this happens, reach out to the card issuer to see if they can correct this error the next time they report to the credit bureau. You may need to file a dispute with them.
If you can’t reach your issuer or run into complications, you can dispute the discrepancy on your credit report directly with the credit bureau. Both Equifax and TransUnion — Canada’s two credit bureaus — let you dispute errors on your credit report online. Be sure to check credit reports from both credit agencies, too. If the error shows up on both, you’ll need to file a dispute with both agencies.
There can also be errors caused by identity theft and unauthorized use of cards and accounts by the credit card issuer and account holder, or other issues regarding who is using and accessing credit information. These unauthorized uses can definitely impact credit scores and cause them to fall.
Once you file your dispute, the agencies will look into your claim and reach out to the lender. If it’s determined that a mistake was made, the error will be removed from your credit report. If not, the ding will remain.
You shouldn't dispute information that’s negative, but accurate. Credit bureaus won’t remove correct information from your report.
Typically your credit scores won’t decrease for no reason
While it may seem like your credit score decreased for no reason, it’s unlikely this is the case. Take a look at your most recent credit report to see if you accidentally missed a bill, ran up too high of a balance, or made one of the other credit faux pas on this list.
Don’t panic if your score drops slightly. Just continue practicing good credit habits, like paying your bills on time and keeping your credit balances low, and your score will rebound quickly.
Fight credit score drop with KOHO
Fluctuating credit scores can drop due to various factors, like missed payments or credit report mistakes reported by national credit bureaus. Late payments impact scores; an auto loan affects average age, sometimes leading to a credit score drop. Timely payments are crucial to maintaining a stable credit score. If your credit score dropped unexpectedly and you want to reign in your fluctuating credit score KOHO can help. Boost your credit scores and work to raise your standing with the major credit bureaus and learn useful tips to keep your credit scores as high as possible.
Courtney is a professional writer, editor and financial literacy enthusiast. You can find her writing on CNET, Investopedia, The Motley Fool, Yahoo Finance, MSN and The Balance. She spends her free time exploring different cities across the globe or enjoy some downtime with her two cats and one dog.