A sudden drop in your credit score can be alarming, especially if you’re unsure why it happened. The key to addressing this issue is understanding the factors that influence your score. Payment history, credit utilization, and the length of your credit history are among the most critical elements. Other factors, such as incorrect information on your credit report, can also play a role. So, why did my credit score drop? Let’s explore seven common reasons and what you can do to improve your score.

1. Late or Missed Payments

Late or missed payments are the leading cause of credit score drops. Payment history accounts for 35% of your FICO® Score, making it the most significant factor.

• How It Affects Your Score: Missing a payment by more than 30 days can lead to a drop in your score. Payments that are 60 or 90 days overdue will have an even greater impact.
• Lasting Effects: Records of late payments stay on your credit report for seven years.

Solution: Set up automatic payments or reminders to ensure bills are paid on time. Even a single missed payment can have long-term consequences.

2. Recent Credit Applications

Applying for new credit can result in a temporary score drop due to hard inquiries.

• How It Affects Your Score: Each time a lender checks your credit report for a loan or credit card application, a hard inquiry is added. Too many hard inquiries in a short period can lower your score.
• Duration of Impact: Hard inquiries generally affect your score for up to one year.

Solution: Avoid applying for unnecessary credit. When you need to apply, group applications within a short time frame, as credit scoring models often treat these as a single inquiry.

3. Increased Credit Utilization

Your credit utilization ratio—how much credit you use compared to your limit—is the second most important factor in your credit score.

• How It Affects Your Score: High credit utilization signals to lenders that you may be overextended. For example, maxing out your credit card can quickly lower your score.
• Ideal Utilization: Aim to keep your utilization ratio below 30%, and below 10% for optimal scores.

Solution: Pay down balances as quickly as possible and avoid making large purchases on your credit cards if you’re close to your limit.

4. Reduced Credit Limits

A lowered credit limit can increase your credit utilization ratio, even if your spending remains the same.

• How It Affects Your Score: For example, if your limit drops from $10,000 to $6,000 and your balance stays at $3,000, your utilization jumps from 30% to 50%.
• Why Limits Change: Lenders may reduce limits due to infrequent use or concerns about your financial behavior.

Solution: Contact your lender to request a higher limit or consider opening a new credit account to increase your total available credit.

5. Closing a Credit Card

Closing a credit card can harm your credit score in two ways: by reducing your available credit and shortening your credit history.

• How It Affects Your Score: A closed account reduces your total credit limit, which can raise your utilization ratio. Additionally, the average length of your credit history may decrease over time.
• Considerations: Accounts closed in good standing remain on your report for up to 10 years.

Solution: Unless the card has high fees, consider keeping unused accounts open to maintain your credit limit and history.

6. Inaccurate Information on Your Credit Report

Errors on your credit report can negatively impact your score. These errors may stem from lender reporting mistakes or identity theft.

• How It Affects Your Score: Incorrect late payments or unauthorized accounts can cause significant damage.
• Detecting Errors: Regularly review your credit report for inaccuracies.

Solution: Dispute any errors with the credit bureaus to have them corrected. Quick action can minimize the impact on your score.

7. Major Financial Events

Events like bankruptcy or foreclosure can severely damage your credit score and remain on your report for years.

• How It Affects Your Score: Bankruptcy can result in a drop of 150 points or more, depending on your starting score. Foreclosures have similarly severe effects.
• Duration of Impact: Chapter 7 bankruptcy stays on your report for 10 years, while Chapter 13 and foreclosures remain for seven years.

Solution: Avoid these events by working with creditors to create manageable repayment plans when possible.

How to Improve Your Credit Score

If you’re asking, “Why did my credit score drop?”, it’s essential to address the root cause. Here are practical steps to rebuild your score:

1. Pay Bills on Time

Payment history is the most significant factor in your credit score. Set up automatic payments or reminders to ensure on-time payments.

2. Reduce Credit Card Balances

Lowering your credit utilization can quickly improve your score. Focus on paying down high-interest debts first.

3. Monitor Your Credit Report

Regularly checking your credit report can help you catch inaccuracies and track your progress. Correcting errors can lead to a quick score boost.

4. Avoid Unnecessary Credit Applications

Only apply for credit when necessary to limit hard inquiries and protect your score.

5. Build a Budget

A budget helps you manage expenses and avoid overspending. Responsible financial habits lead to better credit health over time.

The Bottom Line: Why Did My Credit Score Drop?

A credit score drop can happen for various reasons, from late payments to increased credit utilization. Understanding these factors can help you take the right steps to recover and improve your score. Whether it’s addressing late payments, disputing errors, or managing your credit utilization, consistent and responsible credit behavior is key to long-term financial health.

If you ever need expert assistance or guidance on your credit journey, don’t hesitate to reach out to the Nerds! Additionally, stay updated with the latest tips and information by following us on Facebook, Instagram and TikTok!