Your credit score is an essential part of your financial health. It influences your ability to get approved for loans, credit cards, and even renting an apartment. So, when you notice your credit score has dropped, it’s natural to feel concerned.
There are several reasons why your credit score might have decreased, and understanding them can help you take the right steps to improve it. In this guide, we’ll explore 11 common reasons why your credit score might have dropped and what you can do to fix it.
Missed or late payments
One of the most common reasons for a credit score drop is missed or late payments. Payment history makes up a significant portion of your credit score, so even one late payment can have a noticeable impact.
How It Affects You: Creditors typically report late payments after 30 days, and the later your payment, the bigger the impact on your score.
How to Fix It: Make sure you’re paying at least the minimum due on all your accounts, and set up automatic payments to avoid missing deadlines.
Increased credit card balances
If you’ve recently racked up a higher balance on your credit cards, this can cause your credit score to drop. High credit utilization—how much of your available credit you’re using—can signal to lenders that you’re overextended.
How It Affects You: Credit utilization makes up about 30% of your credit score, so keeping balances below 30% of your total credit limit is crucial.
How to Fix It: Pay down your balances as much as possible and try to avoid maxing out your credit cards.
Applying for new credit
Every time you apply for a new credit card or loan, the lender performs a hard inquiry on your credit report. Too many hard inquiries within a short period can signal that you’re financially desperate, which may lower your score.
How It Affects You: One or two inquiries may not have much of an effect, but multiple applications within a short time can drop your score.
How to Fix It: Avoid applying for new credit unless absolutely necessary, and try to space out your applications over time.
Closing a credit card account
Closing a credit card, especially an older account, can negatively impact your credit score. This is because closing an account reduces your total available credit and may shorten your credit history.
How It Affects You: A shorter credit history and higher credit utilization can lower your score, especially if the closed account had a high credit limit.
How to Fix It: If possible, keep older accounts open, even if you’re not using them frequently, to maintain your credit history and credit limit.
High credit utilization on a single card
Even if your overall credit utilization is low, using too much of the available credit on a single card can hurt your score. Lenders like to see balanced use of credit across all your accounts.
How It Affects You: If one card is maxed out, it can signal risk to lenders, even if you have available credit on other accounts.
How to Fix It: Distribute your spending across multiple cards, and pay down high balances as quickly as possible.
An account was sent to collections
If you’ve had an account go into collections due to non-payment, this will have a significant negative impact on your credit score. Collection accounts signal to lenders that you’re having trouble managing your debt.
How It Affects You: Collection accounts stay on your credit report for up to seven years, affecting your score the entire time.
How to Fix It: Try to settle or pay off collection accounts as soon as possible, and negotiate with the collection agency to have the account removed from your report.
Errors on your credit report
Sometimes, a credit score drop is caused by errors on your credit report. This could be due to inaccurate information, such as accounts that don’t belong to you or payments marked late that were actually paid on time.
How It Affects You: Even small errors can drag down your score, so it’s important to review your credit report regularly.
How to Fix It: Dispute any inaccuracies on your credit report with the credit bureaus to have them corrected or removed.
Maxing out your credit cards
Maxing out your credit cards can have a significant negative effect on your credit score. It shows lenders that you’re relying heavily on credit and may have difficulty repaying it.
How It Affects You: A credit utilization ratio close to 100% can drop your score dramatically, even if you’re making minimum payments on time.
How to Fix It: Try to pay off as much of your balance as possible and avoid charging more to your cards until your balances are lower.
Delinquent loan payments
Missing payments on a loan, such as a car loan or personal loan, can result in a credit score drop. Loan payments are reported to the credit bureaus just like credit card payments, and any delinquencies will hurt your score.
How It Affects You: Even one late loan payment can have a lasting impact on your credit score.
How to Fix It: Stay on top of your loan payments and set up reminders or automatic payments to avoid missing future deadlines.
Identity theft or fraudulent activity
If your credit report shows unauthorized charges or accounts you didn’t open, it could be a sign of identity theft. Fraudulent activity can cause serious damage to your credit score if left unchecked.
How It Affects You: Fraudulent accounts or unpaid charges can lower your score and lead to financial complications.
How to Fix It: Report any suspicious activity to your bank and the credit bureaus immediately, and work with them to remove fraudulent accounts from your credit report.
Changes to your credit mix
Your credit mix—meaning the variety of credit types you have (e.g., credit cards, loans, etc.)—also affects your credit score. If you recently closed a loan or paid off an account, this change in your credit mix could lead to a slight score drop.
How It Affects You: Having fewer types of credit can lower your score slightly, though this impact is usually temporary.
How to Fix It: Maintain a healthy mix of credit accounts, but avoid opening new accounts just for the sake of diversifying your credit.
There are several reasons why your credit score might have dropped, from missed payments to maxed-out credit cards or even errors on your credit report.
The good news is that many of these factors are within your control, and with some careful management, you can rebuild your credit score over time. Regularly monitor your credit report, stay on top of payments, and keep your credit utilization low to maintain a healthy credit score.