There are many different reasons why your credit score could have gone down, including a new application for credit, a missed payment, a change to your credit usage, or even identity theft.
If you aggressively interact with your credit, certain activities can cause your credit score to drop. These activities are all linked to how credit agencies calculate your credit score. As a result, it’s important to understand which factors negatively impact your credit score.
In this post, we will take a look at 12 reasons your credit score can drop, the estimated impact on your score, and how you can prevent your credit score from dropping further
Late or Missing Payments
People miss payments all the time without meaning to. It’s worth noting that having a late or missing payment has the heaviest impact on your credit score. It accounts for roughly 35% of your credit score and having a late or missing payment can cause your score to drop.
Estimated Credit Drop: 50 points or more
Recommendation: Pay your late or missing payment immediately. Your credit score will continue to go down if you continue to fail to make payments. If you missed the payment by mistake, you can contact the creditor or lender and ask them to not report the late payment to the credit agencies. This can work if you have a good relationship with your lender.
Another option is to make your payment and open a dispute with the credit reporting agency. Opening up disputes with valid reasoning can cause the credit reporting agency to remove your late payment from your credit history.
Recently Applied for New loan, Credit Card or Mortgage
This is very common. It’s important to be aware that when you apply for credit there are two types of credit inquiries: hard credit inquiries and soft credit inquiries. They are both different in how they impact your credit score. Hard credit inquiries are reported to the three credit bureaus (Equifax, TransUnion, Experian) and they can lower your credit score.
Recommended Reading: What Credit Score Do You Start With?
Soft credit inquiries do not impact your credit score and are simply credit checks that are not related to lending decisions. They are usually done to give quotes, generate pre-approvals for loans, and even get you set up with credit monitoring.
Estimated Credit Drop: 20-40 points
Recommendation: If someone asks to pull your credit score, ask what kind of pull do they plan to do. A hard pull can impact your score negatively and a soft pull will not. If you have too many hard credit inquiries in a short period (within 1 -2 months), your score can go down pretty quickly.
Credit Utilization Has Gone Up
If you made more purchases using your credit card your credit score could drop if you use too much. A major factor in determining your credit is your credit utilization and how much of it you are using. As a general rule of thumb, you want to use less than 30% of your total credit limit.
Estimated Credit Drop: 30-50 points
Recommendation: Use your credit cards for small purchases only. These include things like gas, groceries, and entertainment. Don’t purchase large ticket items with your credit card because it can spike your credit utilization.
Derogatory Marks (Collections)
There may be instances in which you receive derogatory marks on your credit report. Derogatory marks can cause your credit score to drop. They may even happen without you knowing that you did something wrong. Derogatory marks include things such as an account going into collections, repossessions, or unpaid utilities. They can have a serious impact on your credit score.
If you unknowingly received a derogatory mark on your credit report, you can dispute it with the credit reporting agency or the lender it came from. In most cases, you can get them removed pretty easily.
Estimated Credit Drop: 50 points or more
Recommendation: You may not necessarily know that these things have happened to you. As such it’s recommended that you monitor your credit and be in charge of paying credit cards, loans, and utilities that are under your name.
Credit Limit Decreased
Credit card companies can decrease your credit limit if you are continually pushing your utilization too high or if you are suddenly seen as a higher risk. If you make late payments this shows credit card companies that you don’t manage your credit effectively and pose a risk to them.
As such, credit card companies reserve the right to reduce your credit limit if you manage your credit poorly. They can also reduce your credit limit if you haven’t used a credit card in a certain period of time.
If your credit limit went down and you still utilize the same level of credit, your credit score can drop because your overall utilization will go up if your credit limit decreases.
Estimated Credit Drop: 20-50 points
Recommendation: Make sure to keep your credit utilization below 30% and avoid spreading your credit across different cards. It’s also recommended that you regularly use your credit but in a responsible way so credit card companies can see that you are managing your debt effectively.
You Closed a Credit Account
People that have gotten out of credit card debt tend to completely close out their accounts. Most aren’t aware that this negatively impacts their credit score. Once you close out your credit card, the credit limit associated with that card disappears. This will bring your overall credit limit down and in most cases cause your credit utilization to go up. In most instances, this will cause you some points on your credit score.
It’s also worth mentioning that if this credit card or account happens to be much older, the hit on your credit score will be larger. This is because older accounts on your credit report affect your score differently.
Estimated Credit Drop: 20-50 points
Recommendation: If you have old credit cards that are paid off, don’t completely close them out. Keep them open and use them periodically so your credit history age continues to build up.
Inaccurate Credit Information
There are circumstances in which credit reporting agencies can report inaccurate credit information. This can occur if certain lenders or creditors report inaccurate information to them. This can include things such as payment reported to the wrong account, recorded late payment when it wasn’t, loan forbearance issues, lease companies sending inaccurate information.
Estimated Credit Drop: 20-40 points
Recommendation: Check your credit report periodically to ensure no false information is being reported. Most of the scenarios can pop up when you are moving from one place to another and you simply forget to transfer over correct information. So, be conscious of how all accounts you carry can impact your credit.
Foreclosure or Bankruptcy
These two are big ones. Foreclose or bankruptcy are two things you want to completely avoid, as they can have reek serious havoc on your credit history. A foreclosure remains on your credit report for seven years from the date of the first missed mortgage which led to the foreclosure. It can drop your score by more than 100 points.
Bankruptcy can stay your credit report by 7 or up to 10 years depending on the type of bankruptcy you have. It can drop your score by over 100 points. Most lenders won’t give you the time of day if they see you have filed for bankruptcy or foreclosure in the past.
Estimated Credit Drop: 100 points or more
Recommendation: Do everything you can to avoid going into foreclosure or filing for bankruptcy. Seek loan forbearance from your lender if you are having financial issues and work with a bankruptcy attorney to avoid filing for bankruptcy.
Identity Theft
Experian estimates that identity theft affects 1 in 20 Americans each year.
You may have already been a victim of identity theft at one point in your life. It’s not a nice feeling and it can cause a lot of stress and financial problems if you don’t act quickly.
Estimated Credit Drop: greater than 50
Recommendations: Be careful who you give your information out to and what kind of places you use your credit card. As always monitor your credit reports and bank statements for strange purchases you don’t recognize.
Co-Signed on a Loan or Credit Application
Your kid or friend asked you to co-sign their apartment lease or car purchase, and being the nice person that you are, you agreed. Co-signing alone won’t hurt your credit. But if the person you co-signed for makes a late payment or pushes their credit utilization high, your score could be negatively impacted.
Estimated Credit Drop: 20-40 points
Recommendations: Have a clear understanding of what you are co-signing for and the terms of the credit agreement. It’s also important that you have a way of monitoring the person’s payment history on the credit you co-signed for. This way you know what’s going on at all times.
You Applied for a lot of Credit at Once
This can be quite common if you are shopping for a car or house. You want to get the best interest rate and you decided to try which lender would give you the most competitive rate. If you have multiple hard inquiries on your credit report in a short period of time (3-6 months) your credit score will take a hit.
Estimate Credit Drop: 20-40 points
Recommendation: Don’t over shop for credit. If you do, wait a little bit until your score recovers before you decide to apply again. Also, it’s recommended that you do a little research about companies’ rates before you apply for credit. This can prevent you from having your credit score dinged.
Paid Off a Loan
Paying off a loan can be a liberating feeling. Although it’s great to eliminate loans and debt, paying off a loan can drop your credit score. When you pay off a loan, that credit account will be closed by the lender. Once that gets reported back to the credit reporting agencies, your score will usually drop.
Estimate Credit Drop: 10-30 points
Recommendation: If you have other credit accounts, make sure to keep them open even if you don’t use them. Keeping accounts open will continue to build your credit history even if you don’t use them.
FAQ’s
Why did my credit score drop 30 points for no reason?
Your score could drop up to 30 points due to hard inquiries, balance changes, late payments, or collections. There is always an explanation as to why your credit score could drop
Can a credit score drop for no reason?
Your credit score can drop due to many different reasons and there is usually an underlying reason as to why it has dropped.
