Your credit score is important. It’s a number that potential lenders look at to decide whether or not to give you a loan.
A good credit score means you’re more likely to be approved for a loan with a lower interest rate. A bad credit score could mean you won’t be approved for a loan at all.
A drop in your credit score can be alarming, but there are some common reasons why it may have happened.
Here are some of the factors that can negatively impact your credit score:
- A high credit utilization ratio
- Late payments
- Closed account
- Plenty of recent credit applications
- Decreased credit limits
- Closing a credit card
Let’s look closer at the different factors that can impact your credit, nine reasons why your credit score may have dropped, and what you can do about it.
What Is a Credit Score?
A credit score is a number that represents the creditworthiness of an individual or business. It is used by lenders to determine whether to approve a loan application and what interest rate to offer.
A person’s credit score is based on their payment history, the amount owed, types of accounts held, recent applications for credit, and other factors.
A good credit score indicates that the individual has been responsible with their financial obligations and can be trusted to repay any new loans they may be approved for.
Lenders use this information to assess the risk involved in granting a loan, with those with higher scores being considered less risky than those with lower scores.
Read more: How To Improve Your Credit Score
What Factors Affect a Credit Score?
1. Payment History
Your payment history can have a significant impact on your credit score. For lenders, it is an important indicator of whether you have previously made timely payments on past credit accounts or loans.
If you have a good payment history, it will help improve your credit scores by showing that you are responsible with money and can be trusted to make timely payments in the future as well.
Conversely, late payments or other negative items on your credit report can cause significant drops in your scores.
2. Amounts Owed
The amount owed on a credit card can have a significant impact on a person’s credit score. A high balance can indicate financial stress and difficulty managing money, both of which negatively impact credit scores.
For those with good credit scores, the effect of high amounts owed is minimal. However, those with lower scores may find it difficult to get approved for new loans or lines of credit due to their poor financial standing.
Additionally, those with higher balances are likely to pay more in interest each month which further impacts their finances and potentially increases their debt over time.
3. Number of Credit Applications
Applying for a new loan, credit card or mortgage will likely lead to a hard credit inquiry, also known as a credit check.
The more credit applications you make in one go, the more hard inquiries you will have on your credit report. This can have an impact on your score as recent credit is considered a low impact on the VantageScore® 3.0 model.
4. New Credit Inquiries
When you apply for a new form of credit, such as a loan, credit card, or mortgage, it will likely result in a hard credit inquiry on your report.
This is because the bank, financial institution, or mortgage lender has to assess your credibility and this involves a credit check.
This can have an adverse effect on your credit score as it is considered a low impact on the VantageScore® 3.0 model.
Having four or five hard inquiries over a short period of time can cause lenders to view you negatively and make them less likely to approve your application.
5. Types of Credit Used
There are two types of credit that affect a credit score:
- Credit Cards – These are revolving accounts that allow the user to make purchases and then pay them off over time.
- Installment Accounts – These include mortgages, car loans, student loans, and other types of long-term debt that must be paid back in installments over time.
6. Age of Credit History
The longer you’ve had credit accounts open and in good standing, the more creditworthy you appear to lenders.
This can lead to a higher credit score since it indicates that you have a longer history of managing debt successfully and are likely to continue doing so in the future.
Closing an account that has been open for a long time could potentially impact this factor, resulting in a lower score.
7. Credit Card Inquiries
When applying for a new form of credit, such as a credit card, a hard inquiry is placed on your credit report. One or two hard inquiries usually aren’t enough to cause alarm, but having four or five can have an adverse effect on your score.
The damage from the hard inquiries adds up and may spook other lenders, which could lead to lower scores in the future.
8. Social Media Scouring
Social media scouring is the process of reviewing a person’s social media accounts in order to determine their creditworthiness.
Scouring social media can have a negative effect on a person’s credit score as it can reveal information about their spending habits, relationships, and other personal details that may be used against them in the scoring process.
Additionally, inaccurate or misleading information found on social media can lead to incorrect decisions about an individual’s creditworthiness.
9. Liability Protection
Liability protection affects a credit score by reducing the risk of defaulting on a loan or debt.
Having liability protection can show creditors that you are financially responsible and able to repay your debts, which can positively affect your credit score.
Additionally, having liability protection can reduce the amount of money lenders may require as collateral in order to issue a loan or provide credit.
This helps improve your chances of obtaining favorable terms for loans or credit cards with lower interest rates and better repayment plans.
9 Reasons Why Your Credit Score Dropped
1. High Credit Utilization Ratio
A high credit utilization ratio (CUR) can have a negative impact on your credit score as it indicates that you might pose a financial risk to credit card companies.
High CURs are often associated with low credit scores due to the increased risk of defaulting on payments or becoming unable to repay debts quickly.
As a result, your credit score may be negatively impacted since it will be reported as an indication that you may not be able to manage your finances properly.
Additionally, having high balances on your credit cards can incur additional fees such as interest charges which further decreases your overall score.
Keep your credit utilization ratio low to avoid a negative dent in your credit report.
2. Number Of Inquiries On Credit Reports
When you apply for a loan or other type of credit, an inquiry will show up on your credit report.
Most inquiries are simply soft searches and won’t have a huge impact on your credit score (in the range of 3-7 points), but some hard inquiries (such as car loans, student loans, or mortgages) can be grouped together, making similar inquiries in a short time period not count separately.
The number of inquiries on your report can cause your credit score to drop due to the potential damage from hard inquiries over time.
Additionally, multiple applications for different forms of credit in a short period of time can make lenders wary about approving further applications from you.
3. Late Payments
Making late payments on your credit score can have a negative impact. It can decrease your credit score, as well as incur late fees and interest charges.
The consequences of making late payments on your credit score include lower financial credibility, loss of potential loan opportunities, and higher costs associated with missed or late payments.
Additionally, the information related to these missed or late payments may remain on your credit report for up to seven years.
4. Closed Accounts
Closing or paying off certain accounts can have a negative impact on your credit score. This is because the longer you keep your accounts in good standing and open, the better it is for your credit score.
When you close an account, the average age of your remaining accounts decreases which can negatively impact your score.
Additionally, closing an account may also reduce or eliminate any available credit lines which could also affect your score.
5. Increases In Available Credit
When available credit increases, consumers have more access to funds and are able to purchase more goods and services than they previously were able to.
This can lead to an increase in consumer spending as well as an increase in debt levels for those who take advantage of the increased availability of credit cards.
Read More: How Fast Can a Car Loan Raise My Credit Score?
6. Credit Card Applications
Applying for a credit card can have a positive effect on a person’s credit score. By having a credit card, the individual is demonstrating their ability to manage debt responsibly and pay off their bills on time.
Additionally, having more than one line of credit can help improve your overall score as it shows that you have access to multiple sources of funding.
However, applying for too many cards in a short period of time or using them excessively can negatively impact your score as it indicates that you are taking on too much debt or may not be able to manage it properly.
7. Large Installment Loans
Taking out a large installment loan such as a car loan, student loan, or mortgage can have a positive effect on your credit score.
This is because these types of loans are considered installment debts and have set repayment periods, which means they won’t impact your score as heavily as revolving debts like credit cards and lines of credit.
As a result, taking out an installment loan can help improve your credit mix by providing more balance between installment loans and revolving debts in your portfolio.
This will lead to an increase in overall credit scores since lenders prefer to see both types of debt represented in a borrower’s portfolio.
8. Unsecured Credit Lines
Having an unsecured credit line can have a positive impact on your credit score, as long as you are able to make timely payments on your bill. It shows that you are responsible with money and can manage a loan.
Having an unsecured credit line can help improve your credit score by showing that you are capable of managing a loan and making timely payments on it.
This will help increase your overall credit rating, which could lead to lower interest rates or better terms for future loans.
9. Unexpected Changes To Credit Report
Some unexpected changes to a person’s credit report that can affect their score include:
- Closed credit accounts reported as open.
- Credit accounts were incorrectly reported as late.
- The same debt is listed more than one time.
- Incorrect credit card balance or credit limits.
- Incorrect delinquency dates or other negative information.
How To Fix a Low Credit Score
Steps
Identify the reason for your low credit score
The reason for having a low credit score can be due to a variety of factors, such as paying bills late, applying for too many credit cards or loans in a short period of time, having high amounts of debt relative to your income level, missing payments on past debts or loans and having multiple inquiries on your credit report in a short period of time.
By identifying these factors as problematic for your credit score, you can take steps to improve it such as paying bills on time consistently and not applying for any new credit cards or loans until your current ones are paid off completely.
Take action to improve your credit score
1. Pay your bills on time: Make sure to pay all of your bills on time, including credit cards, loans, and utilities. Missing even one payment can negatively impact your credit score.
2. Maintain a low debt-to-income ratio: The ratio of your total debts (including credit card balances) to income should be less than 38%, as this indicates that you are able to manage your finances well and will likely be able to repay any future loans or mortgages more easily.
3. Avoid applying for new credit cards or loans: Applying for too many new credit cards or loans in a short period of time can look suspicious to lenders and hurt your score.
4. Keep track of all accounts associated with your name so that you know what is being reported to the three major credit bureaus (Equifax, TransUnion, and Experian).
5. Check for errors regularly: You should check for any errors in your reports regularly since these could have an impact on how lenders view you.
Only apply for credit thKeep your credit utilization rate lowat is necessary
Keep track of your total credit across all debts and make sure it does not exceed 30 percent. Pay off revolving lines of credit and close any accounts that have a high balance or high utilization rate.
Reduce your total amount of available credit by closing these accounts, which may help increase your overall utilization rate and improve your score in the long run.
Buy less each month or request a credit limit increase to keep balances small and keep your ratio between 10 percent and 30 percent for better scores over time
Pay off any loans or cards you have open
Try and pay off any open cards or loans you have, starting with the highest interest account. By paying off your debt you will not only have a lower credit utilization ratio but also improve your credit score.
Monitor your credit reports for changes
Sign up for a free credit monitoring service. These services provide access to your credit reports, allowing you to monitor changes in your score.
Review your credit report at least once a month to check for any large changes that could affect your score.
If you notice any suspicious activity or unauthorized accounts opened in your name, contact the fraud department of each affected company immediately and file a police report if necessary.
If you suspect that you have been the victim of identity theft, seek out assistance from an identity theft expert or law enforcement agency immediately as it is a complicated process to resolve on your own
Fix any mistakes on your credit reports
Contact the lender who reported the error and try to resolve the situation.
If unsuccessful, file a dispute with the credit bureau to have any incorrect information investigated.
Review your reports from all three credit bureaus (Equifax, Experian, and TransUnion) to ensure accuracy before filing a dispute for one or more of them.
File your dispute with one of the bureaus (they are required to notify the others).
Expect a response within 30 days after filing your dispute with whichever bureau you choose to use for this purpose.
FAQ
What are some common reasons for a credit score drop?
Some common reasons for a credit score drop include:
- Using your credit card too frequently or having multiple open lines of credit.
- Applying for too many new credit cards, loans, or other financial products in a short period of time.
- Not paying your bills on time or missing payments entirely.
- Having too much debt compared to your available credit limit across all accounts.
- Appearing to be risky based on the types of accounts you have (for example, opening several store cards).
How does credit utilization affect my credit score?
Your credit utilization rate (how much of your available credit you use) is an important factor in determining your credit score.
VantageScore says that it is “extremely influential”, and FICO® says that it accounts for 30% of your overall score.
If you spend more than usual, it will increase your credit utilization rate. The effect on your scores will vary depending on how much your ratio of credit used versus available credit goes up.
For example, if you have a $10,000 credit limit and typically use 15% of it ($1500), but one-month increase spending to 25% ($2500), then the ratio will still be solid overall at 25%.
However, if suddenly increased spending by 50% ($5000), then this could lead to a decline in scores due to high impact caused by high percentage usage ratio (50%).
What should I do if my credit score drops due to identity theft?
- Monitor your credit score and credit reports regularly to identify any suspicious activity.
- Place a fraud alert on your credit file by contacting one of the three national credit bureaus. The other two will be automatically notified when you contact one bureau.
- File an identity theft report with the FTC, disputing any inquiries on your report if necessary
- Monitor your credit scores and reports for further suspicious activity regularly after taking these steps to ensure that no further damage is done to your score
How can I keep track of my credit score?
- Sign up for a free credit report account online. You can find a provider such as FreeCreditReport.com or CreditKarma.com to get started.
- Review your credit score regularly and check for any changes or errors that may have been made in your report since the last time you checked it.
- Check with lenders to see if they require you to submit a copy of your credit score before offering you a loan or other financial product – this will help ensure that you are approved for the best rates possible based on your creditworthiness level at the time of application .
- Monitor statements from lenders regularly so that you can identify any charges or payments that need to be made quickly due to potential late fees.
How can I fix a credit score drop at home?
- Identify the cause of the drop: Look at your credit reports to determine what caused your score to decrease. This could be a missed payment, derogatory remark or other error on your report.
- Take action to fix it: Once you’ve identified the reason for the drop, take steps to rectify it as quickly as possible. For example, if you missed a payment due to medical bills or other unexpected expenses, make sure that it gets paid on time from now on and contact creditors if necessary for help with repayment plans or hardship waivers
- Monitor progress: Keep an eye on your credit scores over time and make adjustments if necessary (for example by setting up auto pay). This way you can ensure they don’t drop again due to similar circumstances in the future
What is the best way to handle credit card utilization?
- Pay down credit card balances: The easiest way to handle credit card utilization is to pay down your credit card balances. If you have large purchases and plan to pay them off in full, make your payment earlier before they are reported to the credit bureaus.
- Request a credit line increase: You may also want to consider requesting a credit line increase if you need more available credit for larger purchases or expenses in the future.
- Refinance with personal loans: Some consumers have found it helpful to refinance their existing credit card debt with personal loans, which don’t contribute as much towards your debt utilization rate as regular cards do since they are not considered revolving accounts like most traditional cards are (with variable rates that change over time).
What is the difference between credit utilization and utilization rate?
Credit utilization refers to how much of your available credit you are using. Utilization rate measures how much of your available credit you use compared to the total amount available.
Credit utilization is typically expressed as a percentage, while utilization rate is expressed as a ratio of credit used versus available credit.
Additionally, credit utilization can be measured for individual cards or for an overall balance across all cards whereas utilization rate only measures one card at a time.
How can I tell if my credit issuer has reported a ding to the credit bureaus?
Check your credit report for any errors or discrepancies. Carefully review each of the three reports from Equifax, Experian, and TransUnion to look for mistakes in your information or unauthorized accounts opened in your name.
If you find any errors on your credit report, file a dispute with the credit bureau or data furnisher that supplied the information (see Step 1 above for more information). You can do this either through the mail or by contacting them directly.
Once a dispute has been filed, you should receive a response within 30 days from both parties involved in investigating and rectifying the issue(s).
If they are unable to resolve it after this time period has passed then they are legally obligated to remove any inaccurate information from their records.
What can I do if I have a delinquency or foreclosure mark on my credit report?
Monitor your credit report regularly for any adverse marks.
File a dispute if you find a derogatory mark that shouldn’t be there, such as an account in collections, bankruptcy, or foreclosure.
Contact the creditor or lender who reported the delinquency or foreclosure and explain the situation to them in detail; ask them to remove it from your credit report ASAP!
If they refuse to remove it from your credit report, contact one of the three major credit bureaus (Experian, Equifax, and TransUnion) and file a dispute with them regarding the accuracy of the information on your report.
Follow up with all parties involved regularly until they agree to remove the mark from your record completely.
Summary
If you have a low credit score, don’t panic. There are a number of things you can do to improve your credit score. By following the tips in this guide, you can make your credit score rise in no time.
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