Why Did My Credit Score Drop? 5 Possible Reasons

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Building your credit score takes time, patience and discipline, and sometimes the ebbs and flows can feel arbitrary. But if you’re wondering why your credit score dropped for ‘no reason,’ there is probably a reason. Here are five common causes why your credit score dropped.

5 possible reasons why your credit score dropped

The reason your credit score dropped is tied to the factors that make up your overall FICO credit score. Payment history has the biggest impact, but how much debt you owe, the length of your credit history, credit inquiries and more weigh into your overall score.

Related: What Is a FICO Score?

1. Late bill payments

One of the top reasons you’ll see your credit score dip is a late or missed payment being reported on your credit file. Your payment history is one of the most important factors in calculating your credit score. So, the first step to recovering your credit score is to make sure that all outstanding balances are paid on time consistently.

2. You paid off a loan or closed a credit card

While paying off a loan feels like a real milestone, it can actually have a negative impact on your credit score. The same goes for closing a credit card.

This happens for two reasons:

1. When you close a credit card, you’re losing some of your available credit, which means you’re impacting your credit utilization ratio. In a nutshell, the more available credit you can access, the better.
2. Closing an account impacts the average age of your credit history. The older the accounts, the better, so closing an old account you can slightly harm your credit history for a time.

If you can, avoid closing accounts, even if you aren’t using them any longer.

Related: Credit Score Myths You Need to Stop Believing (Please)

3. You’ve recently applied for new credit

Hard credit inquiries have a temporary negative impact on your credit. These hard inquiries happen when a lender is reviewing your credit reports and scores when you apply for new credit accounts.

Hard credit pulls can stay on your credit report for up to two years, but generally only affect your credit score for a few months. And, the effect is typically minimal — usually around five to 10 points.

4. Your balances are too high

If you’ve been over using your credit card and nearing your credit limit, you’re likely to see your score drop.

As a general rule, you want to keep your credit card balances under 30% of your available credit. For example, if you have a bunch of credit cards with a total limit of $10,000, keeping your total balance across all of your cards below $3,000 can help improve your credit score or prevent drops.

5. There is inaccurate information on your credit reports

While not common, sometimes there is incorrect information on your credit file.

If you identify any inaccurate information that is negatively impacting your credit score, one of the first things you should do is gather the facts and dispute the information, says Bruce McClary, spokesperson for the National Foundation for Credit Counseling (NFCC).

“The more frequently you’re exposed to the details of your credit report, the more likely you are to react more quickly if there is something that is reporting incorrectly and to dispute those items,” McClary says.

If you identify any mistakes on your credit report you can dispute the inaccuracies with each credit bureau.

Could your credit score drop for no reason?

If you see a drop in your credit report, especially a significant drop, there is usually a reason. If you can’t pinpoint what went wrong, it could be that a credit card issuer closed an account due to inactivity, affecting your credit history, credit mix or overall credit utilization.

Otherwise, you may be experiencing some sort of fraud or someone stole your identity.

Identity theft can negatively impact your credit in a variety of ways: someone could use your information to take out a new loan and then not make those payments, or they apply for a ton of new credit cards and those multiple hard pulls could ding your credit. If you see anything you don’t recognize on your credit reports, you have the right to dispute reporting that is inaccurate and have it removed.

How to check your credit score

As McClary said, being diligent and checking your credit score regularly is important. There are a range of free tools that can help you monitor your credit report including weekly reports from Annualcreditreport.com.

Must read: How to Check Your Credit Score

Bottom line

While seeing a drop in your credit score can be cause for concern, don’t panic. The first step to getting your score back on the right track is to check your credit score regularly, identify any bad habits and try to correct them to move your score in the right direction.