You want to purchase a house, but probably don’t have the cash upfront for it. So, you decide to apply for a mortgage. When the time comes, however, you realize that your credit score is not where it needs to be. Instead of getting pre-approved, you get turned down because your credit score is too low. Getting a car loan, a mortgage, or even renting an apartment can be reliant on having a high score.

If you get turned down for a loan or credit card, you may be left wondering, “Why did my credit score drop?” The short answer is, it depends. For the long answer, read below. There are five factors that make up your credit score. While each one has a different “weight” for how much it impacts your score, taking an action that damages any one of those factors could lead to an unexpected drop.

Table of contents:

Missed Payments

Credit history is the single biggest factor used to calculate your credit score. If you miss one or more payments by more than 30 days, your credit score will drop. Making timely payments is the best way to improve credit. So naturally, the opposite action could destroy your credit score.

This also applies to people you cosign for and joint account holders: if they miss a payment, your score will be affected. This is why it’s essential to carefully consider who you cosign and become joint account holders with. For example, if you don’t close joint accounts promptly after divorce, you could be in for a surprise.

In an extreme instance, an account that’s severely overdue can be sold to a collection agency. As a result, this collection account will appear on your credit report as a separate account, drastically impacting your credit score in a negative way.

Irresponsible Spending

Not surprisingly, splurging like there’s no tomorrow can destroy your credit score. This includes exceeding the limit on one or more of your credit cards or just carrying high balances on your credit cards. Ideally, you want to use 30 percent or less of your available credit limit. Any more than that, and your score will start to decrease quickly. If you do use your credit card, it goes without saying: don’t borrow money you can’t pay it back.

Circumstances Beyond Your Control

If you have been making payments on time and don’t have a high balance, you may be scratching your head and still asking, “Why did my credit score drop?” In these instances, it may not be your fault.

Identity Theft

Check your credit reports to see if you recognize all the accounts listed. If there are a few surprises, you may be the victim of identity theft. There is a silver lining, however: you can freeze your credit for free to prevent any other accounts from being added. You can also contact the companies who opened the accounts to report fraud and the accounts can be taken off.

Reporting Errors

You can also check your credit report to see if there aren’t any new negative items that should not be there. For instance, if it is reported that you missed a payment but you actually didn’t, that is a new credit report error that needs to be fixed. In this instance, you can start the credit repair process to correct this mistake and your score.

Take the first step to clean up your credit, so you can maximize your score.

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FAQ: What Can Cause Your Score to Drop?

Q:Do debt consolidation loans hurt your credit score?

A: They can, but in most cases when used correctly a debt consolidation loan will help your score. If you are making payments on time and taking the initiative to cut your debt load, your score will go up as your debt decreases.
More specifically, applying for a debt consolidation loan will create a hard inquiry on your credit and may decrease your credit age, which can drop your score. On the positive side, your score will improve down the line since the funds from the loan will be used to pay off your credit card debt.

As well, the loan will cause your credit utilization, a.k.a. the percentage of your available credit you use, to drop down to zero. Since 30% of your credit score is based on credit utilization, this is a huge win. Keep in mind that credit utilization only considers revolving credit, which is credit that does not have a set number of payments (credit cards fall into this category).

Disclaimer: once you pay off that debt, this does not mean you should start spending excessively on those cards again. Getting into more debt and missing payments on the loan can do some serious damage to your score.


Q:Do mortgage preapprovals affect credit score?

A: Yes, but only slightly; since the process to get pre-approved is effectively the same thing as a loan application, it requires a credit check that can cause your credit score to decrease by a few points. This is because you will have to authorize the lender to review your credit report and obtain credit scores, which is known as a hard inquiry. The good news is that the score reduction is temporary: this inquiry will fall off your report after two years, but only affects your score for about six months.

Q:Does closing/canceling a credit card hurt your credit score?

A: Yes. According to an article in Experian, closing a credit card account makes you lose the available credit limit on that specific account. This causes your credit utilization ratio to increase. As a result, this looks risky to lenders, since you’re utilizing more of your available credit.

There is an increased risk of damaging your score if you close an account that still has a balance to pay off. You reduce your total available credit limit, but still have the debt. Thus, you hurt your utilization ratio even more.

Additionally, closing an older credit card will lower the average age of accounts in your credit report. And if your account has been in good standing, closing the credit card can have a serious negative effect your score.

Sure, your score may rebound in a few months, provided you make your payments on time. But if you plan to apply for a mortgage, auto loan or other credit soon, don’t close that card out. Timing is everything if you decide to cancel a card.


Q:Does Credit Karma hurt your score?

A: It depends on what actions you’re taking with the app. Simply using Credit Karma to check your credit will not negatively affect your score. On their website, it states “Check your credit reports as often as you want, it won’t affect your scores.” Credit Karma executes what’s known as a soft inquiry, which doesn’t impact scores, by requesting credit report information from TransUnion and Equifax.

However, hard inquiries, which are executed when applying for a credit card or loan through Credit Karma or elsewhere, can affect your credit scores. Hard inquiries are placed on credit reports when applying for a new line of credit, whether that application gets approved or not.

This is true of any credit monitoring app, including other free tools like Credit Sesame and paid tools like SmartCredit.


Q:Do balance transfers hurt your credit score?

A: Overall, a balance transfer should not negatively affect your score as long as you pay off the debt. Be sure to finish paying off consolidated debt before charging more on any credit card, or you could potentially wind up with even more debt and a higher credit utilization ratio.

When you first apply for the card, you may see a few-point drop in your score as a result of the hard credit inquiry. However, this is usually offset by a better utilization ratio because you have a higher total credit limit. As a result, some people see no drop at all.


Q:Does increasing your credit limit hurt your score?

A: Not necessarily. Increasing credit limits can reduce your utilization rate, which is beneficial for your credit score. You may see a short-term decrease in your score because requesting a higher limit will result in a hard inquiry. However, increasing your credit limit should help your credit score long-term.

Note that this is contingent on not increasing the credit card balance.


Q:Does paying off a loan affect your credit score?

A: It depends on the loan. Installment loans, such as student loans, have a predetermined number of scheduled payments that are spread over a preset period. While paying off this type of loan is beneficial for your credit score, it may be better to keep the installment loan open with a history of payments made on time. This shows credit bureaus that you can manage and maintain the account in a responsible manner. In addition, depending on the installment loan, there may be prepayment penalties in your loan agreement. Be sure to thoroughly read your loan agreement to make certain this isn’t the case.

Mortgage loans can come with prepayment penalties as well, which can equate to a predetermined amount of monthly interest payments or a percentage of the mortgage loan amount. As for auto loans, make sure to not skip payments and only pay extra when you can.


Q:How do loans affect credit score?

A: Applying for loans and new credit applications can generate hard inquiries on your report, which can lower your score.
On the other hand, having a variety of loans if they fall into the “good debt” category can help boost your score. Good debt is defined as loans or credit used to better your future or net worth, and can include student loans, small business loans and a mortgage. 10% of your credit score is determined by the types of credit you have, so if you have a variety of good debt, that can be beneficial. And because loans aren’t considered revolving debt, it will not harm your credit utilization (it doesn’t help it though, either).

This doesn’t mean that you should put yourself further into debt for the sake of an increase in your credit score. Loan payments made on time can indeed look good for your score and credit age but if you get behind in payments, that can be detrimental to both your score and credit history.


Q:Do personal loans hurt your credit score?

A: As mentioned earlier, applying for any type of credit (including a personal loan) results in a hard inquiry. This can cause your credit score to decrease by a few points.

As well, applying for a personal loan is essentially applying for more debt. While loans don’t affect credit utilization, managing the debt can affect your credit history. Only take out a personal loan if you are sure that you can pay it off along with any other debt you may have.


Article last modified on December 22, 2022. Published by, LLC