Why Did My Credit Score Drop and How to Fix it
It's not fun when you check your credit report and find that your score has dropped. However, this can happen for a variety of reasons, leaving you wondering why it happened in the first place and how to fix it.
Has your credit score recently dropped significantly and you’re wondering what happened and how to fix it? If so, we're here to tell you that all hope is not lost — you just need a bit of know-how to get your score back up where it should be.
Let's break down why this might have happened, what types of drops are most common, and then look at some steps you can take to turn things around. You don't need any special credit score magic or luck — just knowledge and persistence!
Credit Score Ranges
Let’s start with the basics before diving into why your credit score dropped. First, you need to understand credit score ranges. Knowing your credit score is an important part of managing your finances.
Your credit score is typically a number between 300 and 850 that acts as a snapshot of your credit health. Different credit ranges indicate different levels of creditworthiness, typically based on how well you have managed credit in the past.
Here’s a breakdown of the current FICO credit score ranges (although you can find the VantageScore scoring model here as well):
- Excellent: 800+
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Bad: Less than 580
As you can see, any score below 670 is generally considered to be “poor credit.” Keep in mind that the average American’s credit score is currently 714, so it’s not like most people have excellent credit anyway.
Understanding these credit score ranges helps lenders determine if you’re a reliable borrower or not and gives you an idea of what kind of loan rates you may be eligible for if you’re looking for financing options.
What Affects Your Credit Score?
Now, what affects your score and how do credit scoring models calculate the scores mentioned above? Both major credit scoring models take these five factors into account.
Payment history is an important piece of the puzzle when it comes to credit scoring. It accounts for 35% of your overall credit score and indicates how responsible you are with payment obligations.
This can include credit card bills, car loans, and even student loans. Payment history translates into payment patterns: the more on-time payments you have, the better it looks for your score.
The amount you owe creditors is one of the most important factors when it comes to your credit score. It is also known as the amount owed or the amount due, and it affects your credit score by demonstrating your ability to manage debt. This includes loans, mortgages, credit cards, and any other money you borrow.
If you consistently maintain a low amount owed and make timely payments, then this can be beneficial for your credit score. But on the contrary, if you have a large amount of debt and regularly miss payments, this can cause a drop in your credit score.
Length of Credit History
Your credit history length refers to the length of time that credit activity has been reported to the credit bureaus.
The longer it is, generally speaking, the more favorably credit scoring models will look at you. That's why having a longer credit history can indirectly help you have a better credit score than someone who has a shorter credit history.
Credit mix involves the variety of credit accounts you have, such as credit cards, mortgages, car loans, personal loans, etc. A credit score with a good credit mix shows lenders that you’re able to manage different types of borrowing products responsibly.
Having credit accounts in various categories also signals that you understand how credit works and are prepared for any future financial changes which lead to a higher credit score. On the other hand, having no credit diversity could mean that your credit score will suffer if there’s an unexpected financial change and you’ll need access to credit quickly.
Have you ever heard someone say, “My credit score dropped 100 points after opening a credit card? Why is my credit score going down when I haven’t used any credit yet?”
It’s likely due to new credit, which is any new debt that you take on after you open a new credit card, loan, or line of credit. Generally, when new credit is added to your credit report it will have an impact on your overall credit score.
If you manage the new account responsibly by making timely payments and keeping balances low then new credit can improve your score. On the other hand, taking out new credit or opening too many new accounts in a short period could lead to lower scores.
Why Did My Credit Score Drop? 7 Possible Reasons
Based on the factors mentioned above, are you still unsure why your credit score dropped? If so, let’s walk you through seven possible reasons why your credit score took a hit.
1. Hard Pull
Why does checking your credit score lower it? It only does if it’s a hard credit check.
A hard pull occurs when a lender or creditor checks your credit report to determine if you're eligible for a loan, credit card, or mortgage. It can cause your credit score to drop if the hard pull is conducted too often, as it is seen by creditors as an indication that you are desperate for additional credit.
Too many hard pulls can also signal instability in debt management on your part and could result in lower chances of getting approved for certain loans and mortgages. While hard pulls are necessary for assessing credit risk, it's important not to apply for too many offers in a short amount of time.
2. Missed Payment
Whenever you miss a payment to a creditor, one of the first things it will do is alert the credit bureaus. This missed payment could have an immediate and long-term effect on your credit score, reducing it significantly.
The missed payment not only affects the scores of items related to the missed payment, such as how much money is owed on that account but other items such as payment history and delinquent accounts.
Your missed payments will also stay on your credit report for seven years and can prevent you from accessing financial services in the future. Therefore, it's important to make sure you’re keeping up with all your payments to prevent damaging your credit score in the future.
3. High Credit Utilization
High credit utilization is the percentage of total available credit that you are using. When it's high, it can be a sign to creditors that you might not have enough income to cover your debt payments.
This means that creditors are more likely to interpret high utilization as high debt. So, if your disposable income can’t accommodate the payments, then your risk of not paying off balances increases.
This, in turn, could lead to a lower credit score because lenders will see the high utilization as an indicator of a higher risk factor for lending money or extending additional loans.
4. Lowered Debt
We know how counterintuitive this sounds, but paying off debt can sometimes cause your credit score to take a hit. How so?
In some cases, when paying off your loan early, the creditor takes a hit because they lose out on future interest payments. Most creditors will respond by reducing the credit limit available for that particular loan. This can affect your total debt-to-credit ratio, causing it to increase and thus harming your credit score.
So, does paying off a loan hurt credit? It can, yeah. Paying off an account can lower your overall balance which may affect how much of your available credit you are using and how long you have had certain lines of credit open, two factors commonly used to calculate your credit score.
5. Closed Accounts
When closing accounts without careful planning, you risk decreasing the overall amount of available credit and making yourself appear to be a greater credit risk in the eyes of lenders. This is why you might see your credit score drop 100 points after paying off a car, for example.
By closing too many accounts quickly, creditors may begin to identify you as someone who is actively closing lines of credit and may worry about being paid back for future loans.
Additionally, closing accounts could potentially reduce the average length of your credit history, and the age of your oldest account, and lead to a credit limit decrease. All of these get factored into the calculations used when calculating your credit score.
6. Wrong Information
Sometimes, a sudden drop in your credit score can be due to having the wrong information on your credit report. This wrong information can be reported by the wrong person or wrong business or might be incorrect information such as a wrong address or wrong employment history.
Even if the wrong information is minor, it will still negatively impact your credit score. In many cases, it can take months of work to have this wrong information removed from your report and correct any damage that has been done. So, it’s incredibly important to consistently check your credit report for accuracy.
7. Identity Theft
When identity theft occurs, your personal information and identity are stolen by someone else and used for their gain. This can cause your credit score to take a hit, in addition to the other negative consequences identity theft can bring.
Your credit report could be severely damaged if the thief has opened new accounts or taken out loans with your identity. If that were to happen, the identity thief's activity would cause your credit score to plummet as it would reflect someone else’s actions instead of yours.
To avoid such a situation, it is important to keep track of your identity and look out for possible signs of identity theft before too much damage can occur.
How to Improve My Credit Score? 6 Ways
While it’s never fun to see your credit score lower, there are simple steps you can take to boost it (fairly) quickly. Regardless of what’s affecting your score, try implementing these tips to increase your score and show lenders you’re trustworthy and responsible.
1. Set Up Automatic Payments
Setting up automatic payments is an easy way to make sure you don't miss any due dates on your credit obligations. As you now know, making on-time payments helps boost your credit score, so setting up automatic payments makes it easier to stay on top of your bills and maintain a good credit history.
You can easily set up automatic payments with most lenders (and of course, for your credit card payments), which means you'll never forget or be late on a payment again. It's a great way to simplify the process and maximize your credit score without having to worry about manually submitting payments each month.
2. Reduce Your Credit Utilization Rate
Reducing your credit utilization rate is another easy way to increase your credit score. When you lower this rate, typically by paying off some of your debts or increasing the spending limit on your credit card, you show creditors that you are financially responsible and able to handle debt responsibly.
Doing so helps to improve your credit score by demonstrating these qualities of financial management. All in all, reducing your credit utilization rate is a simple but effective way to demonstrate this responsible behavior and improve your overall financial standing.
3. Pay Off High-Interest Debt
High-interest debt can pile up quickly, and interest payments can consume a large portion of an individual's paychecks. Paying off such debt can instantly increase your available credit and reduce the amount of revolving debt (that’s debt with a repayment cycle or that carries over from month to month).
Furthermore, by paying off high-interest debt in full, you’ll have the ability to eliminate multiple small debts at once and focus on reducing larger debts more slowly.
4. Don’t Close Accounts
One of the simplest (and often overlooked) ways to improve your credit score is to not close accounts. Leaving open credit accounts with a history of on-time payments has a positive impact on your score.
This is because it shows lenders you can manage lines of credit responsibly and don't require a high amount of available credit. Therefore, don't close old lines of credit unless you are absolutely sure that you don't need them anymore.
5. Improve Your Credit Mix
When lenders look at an applicant’s credit report they like to see a variety of different types of accounts that have been responsibly managed over time. This shows them the borrower has demonstrated their ability to manage multiple financial obligations.
To improve your credit mix you should aim to open and manage accounts from different categories, such as getting a new installment loan in addition to existing revolving debt.
Doing so will improve your “credit spread,” increasing the likelihood for lenders that you are financially responsible and able to pay back incurred debt on time.
6. Consider a Credit Builder Loan
Finally, a credit builder loan can be an effective tool when it comes to improving your credit score. It works by providing you with a set loan amount, which is paid into a secured savings account over some time as agreed upon by the lender.
As you make these scheduled payments, they are reported to the credit bureaus and will improve your credit score when timely payments are reported. Credit builder loans also offer you the opportunity to build credit history if you don’t have any yet, so it can benefit those who may be just starting and need credit-building tools.
Get a Credit Builder Loan From Cheese
Ready to start building credit? Look no further than Cheese! With our credit builder loan, you can apply for loans as low as $500 and choose term lengths of 12 or 24 months. And with the autosave feature, we do the rest!
Apply now for a credit builder loan and let us help you achieve a better credit score today.