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What is a good credit score

Why Did My Credit Score Drop?



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.

It can seem that there are people in secret rooms armed with dartboards, roulette wheels, or Magic 8-balls attempting to assess your credit score daily. Sometimes it goes down and you have no idea why. But there is always a pattern, even if you can’t immediately see it. Your credit score goes down because there is an event that took place that – from a creditor’s perspective – makes you seem like a higher credit risk. You just have to find that hidden reason.

Any decrease in your credit score will be disheartening, but it isn’t always clear why your score dropped. The short answer is, it depends. 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.

You missed payments

Credit history is the single most significant 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.

You have irresponsible spending habits

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 back.

Pay back the full balance at the end of each billing period. Know when your grace period is so you can maximize the time you don’t have to pay interest.

Using too much available credit

If you diligently pay all your bills on time, but your credit drops by several points anyway, your credit utilization rate – the ratio of your revolving debt to available credit may be too high. Fortunately, raising your credit score, in this case, is an easy fix. Pay down your balances, and your rate should improve.

Your credit utilization ratio accounts for around 30% of your credit score. Experts recommend keeping the credit utilization rate below 30%. For example, if your total available credit is $10,000 and you have a $2,000 balance, your credit utilization ratio would be 20%.

Keeping your credit utilization ratio at 1% to 9% is even better for your score since higher ratios could cause lenders to see you as a bad credit risk who may have difficulty making payments.

An old account closed and decreased your credit age

If you haven’t used a credit card for years, you may think that canceling the card and closing the account is a good idea, since that’s one less account to worry about. However, the problem with closing an older account is that no longer having the account on your credit report may lower your credit score, since long-standing accounts are good for your credit history and credit score.

Length of credit history makes up around 15% of your FICO score, so it’s important to keep older accounts open to show a lengthy credit history.

Another reason not to close old accounts is that you’ll lower the amount of credit that you have available, which can result in a higher credit utilization rate, lowering your credit score.

You paid off a loan

This one sounds a little counterintuitive. Paying off a loan sounds like it should be good for your credit score. But some consumers have experienced a slight decrease in their score following the completion of a loan repayment.

It can be understood why people would be confused and even a little irritated when this happens. Why would a responsible act like paying off a loan drop your score? The reason has to do with limiting the diversity of your credit.

Basically, the smallest credit score factor evaluates what types of debt you hold and the diversity of your debt. There are good debts and bad debts. Good debts are anything that increases your net worth or lifetime earning potential. When you pay off debts, like mortgages and student loans, you lose a good debt and decrease the diversity of your debt. There’s no reason to panic if this happens.

Certainly, you do not want to take out another loan to improve your score. So relax. In this case, solid management of your remaining accounts will bring your score back up naturally.

Applying for multiple cards in a short period

Having multiple cards can help your credit score by establishing more accounts to add to your credit history, as long as you pay on time. But applying for several credit cards at once in hopes of building a better credit score may backfire, dropping your score instead. That’s because when you apply for a credit card, the credit card issuer pulls your credit report, which is considered a “hard inquiry” also known as a “hard pull.”

Examples of hard inquiries include those from credit card issuers seeking to approve or deny your application, an inquiry from a bank considering your car loan application.

One hard inquiry probably won’t lower your score significantly, since applications for new credit account for only 10% of your score. However, several hard inquiries in a short period of time will likely lower your score for a few months.

At the same time, when several lenders for one type of credit such as a mortgage or auto loan pull your credit report within a short period, your credit score won’t necessarily drop. That’s because most credit scoring models lump those inquiries together and count them as a single inquiry – 45 days for FICO or 14 days for VantageScore, for example.

Even though hard inquiries can stay on your credit report for up to two years before they’re automatically removed, hard inquiries aren’t likely to affect your credit score for more than a year.

Not having a diverse credit mix

If all you have is a few credit cards, you can still have a good credit score. However, you can have an even better credit score if you have a “credit mix” of more than one type of credit in your credit report. For example, a credit mix could include a mortgage, student loan, car loan and a couple of credit cards.

Having a mix of credit won’t impact your credit score significantly – it accounts for only 10% of your FICO score – but it can still benefit your score.

Failing to monitor your credit report

You should review your credit report at least once a year to look for errors that can affect your credit score, such as accounts reported incorrectly or even someone else’s credit information mistakenly added to your credit report. You can typically order one free credit report annually at 

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.

You’re the victim of identity theft

If you didn’t do anything wrong that negatively affected your score, maybe someone else did. If someone got your credit card number, they may have run up a balance in your name. Your Social Security number could also be compromised. You may have new accounts – or new accounts that have been run up and already gone to collections.

Again, review your credit reports to make sure you recognize all the accounts and that there’s nothing new you didn’t expect to see. If there is, it may be time for a credit freeze. You can freeze your credit for free to prevent any other accounts from being added. Contact the companies who opened the accounts to report fraud and the accounts can be taken off.

You have a new credit report error that you need to correct

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.

A cosigner or joint account holder did you wrong

Cosigning is often risky business. You want to help someone out because they have weak credit, so you agree to cosign. But if they don’t pay the debt back, you’re on the hook and nonpayment will affect your score. If the bills aren’t coming to you or you aren’t checking the paperless transactions, then the first sign of trouble might end up being a missed payment on your credit report. This would negatively affect your score.

If you have an authorized user who runs up the bill and refuses to pay you will be on the hook too.

This can also happen to joint account holders who separate. Even if a divorce decree decided that one partner was responsible for a debt, if the other partner doesn’t remove themselves as a joint account holder, they could experience credit damage if the responsible party doesn’t pay. This is why you should always address joint accounts removals promptly after a separation.

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?

Do debt consolidation loans hurt your credit score?

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.

Do mortgage preapprovals affect credit score?

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.

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

Yes. 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.

Does Credit Karma hurt your score?

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.

Do balance transfers hurt your credit score?

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.

Does increasing your credit limit hurt your score?

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.

Does paying off a loan affect your credit score?

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.

How do loans affect credit score?

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 look good for your score and credit age, but if you get behind in payments, that can be detrimental to your score and credit history.

Do personal loans hurt your credit score?

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.


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