Your credit score is calculated based off the information in your credit report. To create your score, the information is broken down into different categories or factors. These factors may be weighed differently based on their importance. For instance, your payment history and utilization tend to carry the most weight in calculating your score.
When information is updated in your credit report, your score may change as well. By how much depends on the nature of the updated information. Because information in your credit reports may be updated frequently, changes that cause your score to fluctuate may not be obvious.
There are also different scoring models and many companies that provide credit scores. Scoring models may 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.
Below are some common reasons why you might see a drop in your credit score, along with what to look for on your report.
High utilization is a fancy way of saying your credit card or lines of credit 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. Once the balance is reported as being paid off your reported utilization should return to prior levels.
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/$2,000). 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 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 payment 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. 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. Even though this is the case, if you pay off an installment loan, it’s a good thing for your finances and you should celebrate that achievement.
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. For example, applying for a credit card, mortgage or car loan will all result in a hard inquiry. If you requested a credit line increase for one of your existing 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— it’s usually for a background check, credit monitoring you signed up for or something similar.
As you can see, there can be multiple answers to the question: Why did my credit score drop? There is a lot of information on a credit report. Remember, a changing score often means changing information. Carefully read your credit reports again. You may have to dig for some clues to account for a fluctuating credit score.
If you’d like help reading through your credit report, we’ve created an interactive guide that explains each important section and how the information may impact your credit score.