Summary: Credit scores drop for a variety of reasons, be it, late payments, increase in credit card debt, or too many hard inquiries. Learn why your credit score drops and how to improve your score.
No one likes to see their credit scores drop.
You know you need a solid credit score to get a mortgage or auto loan.
Plus, a high credit score is often vital in securing basic household utilities and can even help you to get hired by a new employer.
So it can be frustrating to see a big drop in your credit score.
But there are some action steps you can take to fix the situation.
We hope to answer your question of, 'Why did my credit score drop?'
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Reasons Why Credit Scores Drop
These are some of the reasons for a drop in credit scores:
- Missed or late payment
- Increased credit utilization
- Recently closed accounts
- Recently paid off auto or student loan
- Derogatory mark on your credit report
- Recent loan application
Missed or Late Payment
Since your credit score is meant to measure how well you can manage credit, a missed or late payment on a loan causes your score to drop.
Even if you only pay one loan a few days late, this will cause a decrease in your credit score.
Here we'll add a notable quote or an interesting statistic everyone will be interest in.
Increased Credit Utilization
Your credit utilization is how much debt you currently have divided by your total credit limit.
- Total debt of $8,000 divided by a credit limit of $16,000 = 50% credit utilization rate
- Total debt of $8,000 divided by credit limit of $32,000 = 25% credit utilization rate
In both cases, the amount you owe is the same. But in the second scenario, you’re better off because lenders generally like to see a credit utilization rate of 30% or lower.
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So if you’ve recently added to your debt and your credit limit remained the same, your credit utilization rate has increased.
This leads to a lower credit score.
Recently Closed Accounts
Another possible cause of a decreased credit score is that you recently closed one of your credit accounts.
If you’ve shut down an older credit card, that can cause a dip in your credit score. This may seem strange, but there are a couple of reasons.
- Age of credit (how long you’ve been a borrower) matters to credit bureaus. Closing old accounts means they have a less complete picture of your credit history.
- Closing an account can affect your utilization rate, since your total credit limit goes down when you have fewer accounts.
Recently Paid Off Auto or Student Loan
So you finally fnished paying off a major debt. Congratulations!
Unfortunately, paying off a car loan or your student loan balance in full, while a good thing in theory, can negatively impact your credit score.
This dip in your credit score is likely to be very brief. It affects your total mix of loan accounts, and if your remaining debts carry a larger balance, that throws off your score as well.
Sometimes your credit score will temporarily drop when you receive a new credit card. Don't worry, you should gain those points back within a few months.
Derogatory Mark on Your Credit Report
If you’re not sure what this is, a derogatory mark on your credit report is anything that signals something negative to creditors.
Examples of derogatory marks include:
- Missed payments
- Tax lien
- Civil judgment
- Delinquency on student loans
- Default on student loans
Derogatory marks will remain on your credit history for quite awhile. Some last for 7 years, while others (like bankruptcy) can remain for 10 years.
New Credit Inquiries
If you’ve recently applied for a new loan, that can negatively impact your credit score.
Applying for a line of credit, such as for a store credit card, will drop your score. Other types of loans or credit cards you apply for will also result in a lower score, because the lenders will do a hard inquiry or a hard pull of your credit report.
You may also notice a more negative impact if you’ve been opening multiple accounts in a short period of time.
Several hard inquiries for new credit cards during the same month, for example, may signal to the credit bureaus that you’re a little desperate.
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How To Improve A Low Credit Score
Fortunately, there are a few steps you can take to raise your credit score.
The key thing to keep in mind is that repairing or improving a low credit score won’t happen overnight. There is no “quick fix” for a poor credit score.
That said, here are the actions you can take to improve a low credit score:
- Monitor your credit score and credit report
- Dispute any incorrect negative marks on your credit report
- Make payments on time
- Reduce your total debt
- Avoid taking on new debt
- Don’t open a lot of new accounts at the same time
- Ask current credit card companies for an increase to your credit limit
Let’s dig into these just a bit.
Monitor Your Credit Score
It’s easy and free to see your current credit score. Simply sign up with one of the many platforms that give updated credit scores on a weekly or monthly basis.
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At the very least, you should also check your full credit report with each of the three reporting agencies once a year. So every four months, check either Transunion, Equifax, or Experian.
Dispute Credit Report Errors
Keeping an eye on your credit score helps you to be aware of any problems and fix them as quickly as possible.
If there’s a mistake on your credit report, you’ll want to dispute it right away.
Make Payments On Time
Whether or not you’ve ever been late or missed a payment, building a consistent track record of on-time payments will help your score.
This won’t instantly improve your credit score, but the best you can do is keep plugging away at your debt and payments so that your score will gradually improve.
Reduce Total Debt
Paying down debts (not just making minimum payments) will also eventually raise your credit score.
Your credit utilization rate will decrease with each debt amount you pay off. This helps improve your overall credit score.
Avoid New Debt
Along those lines, don’t jump to buy something else on credit or take out a new loan. That won’t be helpful in improving your credit score.
Don't Open Too Many New Accounts At Once
If you do need to open up a new credit card or something similar, be sure to be reasonable. Open up one card at a time, not five.
Since too many hard inquiries negatively impact your score, you don’t want to do a bunch at the same time.
Ask For A Credit Limit Increase
You can lower your credit utilization ratio if you get your credit limit raised. An easy way to do this is to call your current credit card company and request a higher credit limit.
Of course, if they agree, this isn’t an excuse to spend more. You want to keep your spending the same as before. By increasing your credit limit, your credit utilization will improve.
You Can Improve Your Credit Score
The bottom line? You can definitely improve your credit score if it’s not where you need it to be.
Know the reasons behind your lower score, and take action to make it better!
Kate Underwood is a former English and French teacher, now using her obsession with language as a freelance writer and proofreader. Personal finance is her passion, so she writes on financial subjects like budgeting, debt freedom, frugal travel, side hustles, and more. You can find her at www.kateunderwoodwriter.com.