There are different scoring models and many companies that provide credit scores. Scoring models even change over time as they update how information is processed and a score is calculated. It’s common to see differences in scores from one model to the next. That said, if you see a big drop in your score, it’s usually triggered by something specific. Here are some common reasons why you might see a sudden drop in your credit score, along with what to look for on your report.
Reported high utilization
High utilization is a fancy way of saying your credit card account balances may be high compared to your available credit. Lenders like to see that the outstanding total balance on your credit cards is below 30% of what you have available. If your total credit limit across all your cards were $10,000, you’d want to keep your total balances below $3,000 to limit the negative impact on your score. Of course, getting at or close to $0 is best. Low utilization shows lenders that you are a responsible borrower and repay most or all of your purchases quickly.
Did you make a large purchase on a credit card recently? It’s easy to inflate your balance with big-ticket items like home appliances, furniture and home repairs. Even if you paid it off quickly, there is a chance your lender reported this higher balance before you paid it off. As long as there haven’t been other significant changes, your credit score should bounce back once the balance is reported as being paid off, since it should lower your reported utilization. Check your credit report again to see if the displayed balances reflect any major purchases or changes.
You closed an account
Closing a credit card account can affect your credit score in a couple ways. If you close one account, maybe one you haven’t used in a while, but still have a balance on other cards, it can increase your utilization. Let’s say you have two credit cards, both with a $1,000 credit limit. One card has a $500 balance, and the other, a card you never use, has no balance. Your current utilization rate is 25% ($500/$2000). That’s below the 30% threshold lenders like you to be at. But if you close the second card that has no balance on it, you’ll drastically increase your utilization—up to 50%! You have to be mindful when closing credit cards for this reason.
Closing a credit card can also impact your score by changing the average age of all your accounts. Lenders like to see that you have accounts with a long history of on-time payments. Generally speaking, the older the average age of your accounts is, the better your score will be. If you close an account that’s been open for a long time, it could bring down that average. Think carefully about closing old accounts, especially if you want to limit any negative impact to your score.
Other types of debt can play a role too. Did you recently pay off an installment loan? Those are loans with fixed terms and payments schedules—accounts like auto loans, mortgages and student loans. Sometimes, paying off these loans may cause a score to drop slightly, which may seem counterintuitive. One of the benefits of these loans to your credit score is that they diversify your credit mix. Your credit mix has a relatively small impact on your score. Essentially, it measures how good you are as a borrower with different types of debt, not just credit cards. If you pay off one of these loans, it may fall off your credit report. And if it was your only installment account, it would mean that your current credit mix may not be varied, which could cause a slight drop in your score. If you’ve paid off a big installment loan recently, congratulations! That’s an amazing financial accomplishment. Healthy habits like those you probably used to pay off your debt will continue to help you improve your credit health over time.
A recent hard inquiry
A hard inquiry on your credit report can also temporarily lower a score. Hard inquiries happen when a lender or company reviews your report with the intent to make a lending decision or offer you a contract. Even accounts or applications that may not seem like they would trigger a hard inquiry sometimes do. For example, many cell phone plan providers do a credit check before approving a new contract. Additionally, if you requested a credit line increase for one of your credit cards, it may also trigger a hard inquiry. This account would already be on your report, and because it’s a minor change, it could be easy to miss on a quick read-through.
Soft inquiries on your credit report can only be seen by you and do not impact your credit score. If you see a soft inquiry on your credit report, it simply shows that you or another company checked your report. It’s important to note that to be considered a soft inquiry, the company checking can’t be using the information to make a lending decision—it’s usually for a background check, credit monitoring you signed up for or something similar. If you apply for a loan or line of credit, that would trigger a hard inquiry.
There is a lot of information on a credit report, so it can be easy to miss something. Plus, with how busy people can be, it’s not unreasonable to forget about adding or closing credit accounts. Remember, a changing score means changing information. Carefully read your credit reports again. You may have to dig for some clues to account for a fluctuating credit score.