- Your credit score measures the likelihood that you'll pay your debts back on a scale of 300 to 850.
- Any action that casts doubt on this likelihood, like a late payment or high utilization ratios, will lower your credit score.
- Opening a new credit account will also lower your credit score, though it can be worth the drop.
A credit score is a metric that predicts your likelihood of paying off a loan on time based on information on your credit reports. Your credit score may not significantly impact your day-to-day life, but it plays a significant role in the major financial milestones of your life, like taking out a mortgage or auto loan. Your credit score also comes into play when you apply for a credit card or even an apartment lease.
A drop in your credit score is legitimate cause for concern. It can be frustrating and lead to questions about what caused the drop and whether it can be fixed. There are often clear reasons for a score decrease and ways in which to address them.
Common reasons for a credit score drop
According to Rick Eicheldinger, a certified financial planner and the director of financial planning at Facet, a credit score consists of a few factors — each weighed differently by the algorithms that calculate your credit score, like FICO and VantageScore.
While the exact algorithms are kept secret, we have a rough idea of how credit scores are calculated. Under FICO, the most popular scoring model, payment history is the most important factor, making up 35% of your score. Credit utilization ratio closely follows at 30%. The remaining 35% is broken down into length of credit history (15%), new credit (10%), and account diversity (10%).
When your credit score drops, it's usually because your activity negatively affects one of these factors. Here are the most common reasons your credit score dropped.
1. You missed a payment
This one is a bit clearer-cut than the rest: Your credit score goes down when you don't pay the money owed. "When you make a late payment, it will show up on your credit report as an 'account delinquency,' which lenders view as a bad sign," says Michael Branson, CEO of All Reverse Mortgage. Delinquencies are generally reported when your payments are over 30 days late. The delinquency gets more severe with every additional 30 days you don't make a payment.
Other missed payments outside your credit accounts can also end up on your credit reports and hurt your credit score, such as rent payments, subscription fees, or buy now, pay later programs. "If you make payments significantly late or miss them altogether, you are likely to do the same with any loan or line of credit you take out," Branson says.
According to Tiffany Cross, executive vice president of national sales at CredEvolv, a new late payment can drop your credit score by up to 60 points. The higher your score pre-delinquency, the further it will fall.
2. You have too much debt
A credit utilization ratio is the amount you owe compared to the amount of credit you have available, says Eicheldinger. An ideal credit utilization ratio is below 30%, though the lower your ratio, the better. This applies to all your revolving credit accounts combined, as well as each credit account individually.
Say you have two revolving credit accounts on your credit report. Account A has a $4,000 limit, of which you're using $1,000. You have a $6,000 limit on Account B, and you're using $2,500. Your credit ratios are 25% for Account A, 42.67% for Account B, and 35% overall. This spread will bring your credit score down.
Cross says that using the entire balance on your credit cards without paying them off, also known as maxing out your credit card, can be especially detrimental to your credit score. It brings your credit utilization ratio to 100% and demonstrates that you can't repay what you owe.
3. You haven't used your credit card in a while
A credit utilization ratio of 0% can also negatively impact your score, as it doesn't show any use occurring on the card. If you're not using it, you can't show that you can pay it off. Your card provider may close your account if you don't use your credit card for an extended period.
Another factor credit scoring algorithms look at is how recently you used your card. More recent usage will help your credit score, while inactive credit cards can lower your credit score.
4. You opened a new credit account
In the long run, applying for more credit can help you build credit by expanding your payment history and raising your credit limit, which will help you keep your credit utilization ratio low. However, in the short term, a new credit account will hurt your score by lowering the average length of your credit history.
This dip is due to the hard inquiry you add to your credit report when applying for new credit. Any time you apply for a credit card, loan, mortgage, or new line of credit, your lender checks your credit report from one of the three major credit bureaus by conducting what's called a hard inquiry or a hard pull. "This type of inquiry can temporarily drop your credit score, usually by up to five points," says Branson.
Hard inquiries shouldn't deter you from new credit, and a five-point drop isn't significant. However, multiple hard inquiries for different types of credit in a short amount of time will have a greater effect on your credit, causing creditors to wonder why you need so much credit in such a short period of time.
Hard inquiries stop factoring into your credit score calculation after one year and fall off your credit report entirely after two years.
5. You closed a credit account
If you open an account, your score can decrease. If you close an account, your score can, once again, drop. When you close a credit card, it can increase your credit utilization ratio. For example, you might owe 50% of your credit limit on one card and 10% on another but decide to close the second because you don't use it often enough. Now your ratio goes from 30% to 50%, even though you haven't spent any more money. It can also hurt your score if it was an older card, shortening your ongoing credit history.
6. You filed for bankruptcy
If you're in so much debt that you need to file for bankruptcy, your credit score has likely been dropping for some time. However, opting for a debt relief solution like bankruptcy presents more issues for your credit score.
A bankruptcy can lower your credit score anywhere between 100-200 points, sometimes even more depending on your credit score pre-bankruptcy. In the unlikely scenario that you file for multiple bankruptcies, you may find it difficult to borrow money for years.
7. Errors on your credit report
Mistakes and errors in your credit report can have a negative impact on your credit score. Because of this, it is important to check your credit score on a regular basis to ensure that the activity in your credit accounts is being reported accurately.
8. Identity theft
If none of these scenarios apply to you, but your credit score is still decreasing significantly, you may have to consider the possibility that your identity has been stolen. Someone with your Social Security number can open a line of credit in your name. When they don't make good on the balance that they've racked up, your credit score pays the price.
Less common reasons for a credit score drop
1. Drop in available credit
A drop in available credit can result in an increase in your credit utilization ratio, which can negatively impact your credit score.
2. Collection accounts
A collection account is an account that has gone beyond a missed payment. Most creditors do not put an account in collection status until there are several missed payments, which is why an account in collection status is so damaging to your credit score.
3. Becoming an authorized user on a mismanaged account
Becoming an authorized user on someone's credit card is often advised as a way to build credit; the other part of that advice is to become an authorized user on an account where the primary account holder pays the bill on time, every time. Just one missed payment can result in a credit score drop and defeat the purpose of doing it in the first place.
How to recover from a credit score drop
A bad credit score doesn't have to last, though you should act quickly to mitigate further damage to your credit. There are a few ways you can fix your credit score.
1. Make future payments on time
Starting with an obvious answer: Always try to pay your bills on time. If you've recently damaged your credit score, it's going to take time to bring it back up. A consistent payment history will go a long way toward increasing your credit score. Set up autopay if you've forgotten to pay by the deadline in the past.
2. Don't apply for any more credit
Avoid any additional hard inquiry deductions by not applying for any unnecessary credit. "Keep your spending limited to one or two cards and pay them off in full each month once you've climbed your way out of debt," says Eicheldinger. "Before you open that next card or charge that next item, think, do you really need it?"
3. Keep your accounts open
Instead of closing your credit cards and putting everything you owe on one account — leading to a lower credit limit and higher credit utilization ratio — keep your cards open. Buying even one or two things a month on a credit card can have a more positive impact on your credit score than canceling it.
4. Look for inaccuracies in your credit report
Sometimes it's not you, it's a mistake or fraud. Always review credit reports to check for errors, says Eicheldinger. According to the CFPB, you should also look at old, rarely used credit cards to ensure you aren't experiencing identity theft. If someone else is using your credit card — and clearly won't be paying it back — it could explain an unexpected dip in your score. In this case, contact your credit card company to report your card information as stolen.
Any negative information on your credit report as a result of fraud or a reporting error should be disputed with the credit bureaus — Experian, Equifax, and TransUnion.
You can also sign up for identity theft protection services that will insulate your identity and prevent identity theft. The best identity theft protection services have features that assist you in recovering your identity after an identity theft incident.
5. Pay off your debt
Let's preface this by acknowledging that paying off debt isn't always possible immediately and that getting into debt in the first place is easy, with high-interest rates and skyrocketing prices for school and rent. However, there are some strategies you can use to pay off your debt quickly.
Eicheldinger recommends using the avalanche payment method any time you can put spare money toward your debt. This technique prioritizes debts with the highest interest rates, so you'll end up paying less in interest. "This enables you to lower your credit utilization ratio and keep more of your hard-earned money in your pocket as you build your credit," he says. "Every additional dollar you drive toward your high-interest debt gets you closer to earning interest on your money — instead of paying somebody else to borrow theirs."
6. Monitor your credit regularly
Review your credit on a regular basis, know your credit score, and ensure that all reporting is accurate and that you can be aware of any changes or errors. You can access your credit report for free at AnnualCreditReport.com.
7. Consider professional help
If you need additional help, seek credit counseling or credit repair services.
Frequently asked questions about credit score drops
How long do delinquencies last on your credit report?
Delinquencies last for seven years before they fall off your credit report. While they will continue to affect your credit until then, their effect on your score will wane as they get closer to the seven-year mark.
How long will it take for my credit score to recover?
The time it takes for your credit score to recover will depend on what caused it to drop. If it is a new credit account, maybe a few months; if your credit utilization increased, typically shortly after you pay your balances down. But if your score dropped because of missed payments, it could take a few years.
Can you remove negative information from credit report?
Accurately reported negative information cannot be removed from your credit report. You can only repair your credit by building positive credit on top of the negative information.
