Key Takeaways:
- Your credit score changes based on the information being added or removed from your credit report.
- Important factors like your payment history, credit utilization, new credit and account closures can impact your credit score.
- Fraudulent items on your credit report may be the reason your score dropped as well, so keep regular tabs on your credit report information.
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Your credit scores are calculated using information in your credit reports, so it’s normal to see your score change as lenders provide updates to that information. A slight drop in your score may not be cause for worry, especially if you’re consistently practicing good credit health habits. Here are some reasons why your credit score may have dropped:
You missed a payment
Your payment history is one of the most important factors in your credit score. Missing even a single payment can have a significant impact on your score. That said, there’s no exact answer to how much a particular missed payment will affect your score. This depends on your credit history.
Payment history is built month-by-month as lenders report your account status to one or more of the three national credit reporting agencies (TransUnion, Experian and Equifax). The payment history for traditional credit products like credit cards, car loans, mortgages and student loans may appear in your credit report for each account you have. Some Buy Now, Pay Later loans may appear on your credit report as well.
If you missed a payment, set up automatic payments if you can going forward. This is an easy way to keep this important credit score factor in check. If you see a big credit score drop and aren’t sure if you missed a payment, review the payment history on each account in your credit report. You’ll be able to find potential missed payments there. If you see a missed payment listed but don’t think it’s accurate, you can contact your lender for more information.
Your credit utilization rate increased
If you’ve made a big purchase and haven’t paid it off yet, or you keep high balances on your credit cards, your score could be affected. Ideally, you want to keep your credit utilization rate lower than 30%. This means if you have a $10,000 credit limit, it’s a good idea to try keeping a balance of less than $3,000 each month. Because there are different scoring models, 30% isn’t a magic number. It's more of a recommended goal as you work to decrease your balances. Paying off your balances on time and in full each month is key to maintaining good credit health.
As a debt consolidation strategy, some people like to use a balance transfer credit card to help lower their credit utilization rate and buy some time to pay down credit card debt. This isn’t necessarily a bad idea. But applying for a new balance transfer credit card can impact your credit score temporarily because of the resulting hard inquiry. Inquiries tend to have less of an impact than missed payments and credit utilization.
Using a balance transfer card or other approach can help ease debt burden in the short term, but you should always focus on developing good credit habits. If habits don’t change, it’s easy to continue to add more debt, turning short-term fixes into a long-term problem.
Your credit limit was reduced
Credit card issuers can change your credit limit. If your credit limit on a card or cards is lowered while you still have outstanding balances, this could increase your credit utilization rate, as outlined above. An increase in your credit utilization rate could negatively impact your credit score.
You will typically get a notice from your card issuer when your credit limit has been changed. If the change is due to negative information in your credit report, the card issuer must provide you with an adverse action notice that provides the specific reason for the credit limit adjustment.
You applied for credit
Applying for credit card or loan offers can cause a drop in your credit score. Both hard and soft inquiries appear on your credit report, but it’s the hard inquires that affect your score. Inquiries can stay on your credit report for up to two years, and the impact to your credit score by hard inquiries tends to lessen over time.
You were a victim of fraud
Protecting your personal information is important. If it falls into the wrong hands, one of many scams a fraudster could commit is using your personal information to open a loan in your name. This is why you should read your credit report regularly or sign up for a credit monitoring service that offers alerts to important changes in your credit report. You can get your credit reports free each week at annualcreditreport.com.
As you read through your credit report, be alert for any unfamiliar accounts or information. If you suspect an account on your credit report is the result of fraud, there are several steps you can take. These include contacting the company directly, reporting the fraud to the Federal Trade Commission, and disputing the item with credit reporting agencies like TransUnion.
Pro Tip:
Read your credit report regularly. The more you monitor your credit, the easier it can be to spot inaccuracies or fraud. Learn about each section of your credit report with our interactive guide.
You declared bankruptcy
Declaring bankruptcy is a significant financial decision and can have a substantial, negative impact to your credit score. A bankruptcy will appear in the public records section of your credit report.
How long a bankruptcy stays on your credit report depends on the type of bankruptcy you’ve filed. A Chapter 7 bankruptcy can remain on your credit report for 10 years, while a Chapter 13 bankruptcy will stay on your report for seven years. Even though bankruptcies can be a serious stumbling block, over time, you can rebuild your credit.
You paid off a loan
If you paid off a loan or closed a credit card account recently, you may notice a drop in your credit score. This can seem contradictory: You got rid of debt, so why does your credit score go down? This is because credit scoring models tend to favor longstanding, active accounts in credit score calculations.
An active, longstanding and diverse credit history can show lenders you’re a responsible borrower and ultimately be beneficial to your score. If you close a credit card or pay off a loan, it may lower the average age of your active accounts and drop your score. If you paid off all your credit card debt on a particular account, you may want to consider keeping the account open, especially if you’re thinking of applying for credit soon, like a mortgage or auto loan.
It’s best not to do anything that may impact your credit score negatively prior to shopping around for major loans. On the other hand, if you’re not in the market for a new loan and you’re worried having a credit card open would cause you to spend more, closing the credit card account could make sense.
Paying off a loan or closing a credit card can be a responsible achievement which may save you money and can, financially speaking, outweigh the effects of a drop in your score.
How long does it take for a credit score to go up after paying off debt?
If you paid down your credit card balance but didn’t close your account, that’s a positive for your credit utilization rate. So you may see it reflected in your credit score when the updated account information is provided by the lender. If you closed an account or paid off an installment loan, it can be difficult to say how long it will take for your score to rebound. However, with consistent good habits like making your payments on time and keeping your credit card balances low, you should see a steady increase in your credit score over time.
What to do about a drop in your credit score
As you continue your path to healthy credit, your credit score sometimes may go down for one reason or another. Often, you may expect it, like when you apply for a new car loan or mortgage. Sometimes there are unexpected mistakes, like missing a payment. Either way, it’s normal that dips in your credit score happen.
Time and consistent good habits are the keys to long-term credit health. If you’re looking to rebuild your credit after a setback, make sure you understand the credit score factors and monitor your credit report regularly with free, weekly reports from annualcreditreport.com. If you keep building your credit knowledge and develop good habits, you can achieve your credit score goals.
Credit Score Frequently Asked Questions
Are there different scoring models?
Yes, there are several different scoring models. How each model weighs their factors can vary, so it is normal to see slight differences in your credit score depending on which model is used and which credit report they use to calculate the score.
How often do scores update?
Your credit scores update based on added or changed information in your credit reports. Credit reports are updated when lenders provide information to the credit reporting agencies. Depending on how many open accounts you have, new information may be added to your reports frequently, so your credit score can change frequently as well.
Can I dispute my credit score?
You can’t dispute your credit score. However, you can dispute the information in your credit report, which is used to calculate your score. If you see inaccurate information in your credit report, you can submit a dispute through the TransUnion Service Center. Visit our Dispute page to learn more.
Will my score go down if I check my credit report?
No. When you check your own credit report, it’s considered a soft inquiry, which does not impact your credit score.
