Why Did My Credit Score Drop?

Being an adult is hard. There are many parts of life that you need to deal with. One important part of life is your credit score. Your credit score can help you in more ways than you realize. However, if you have a low score, then you may run into a variety of different issues. When monitoring your credit, you may see that your score decreased from the last time you checked. If that’s the case you may be wondering, “why did my credit score drop?”. The answer may be more simple than you realize (but it could also be bigger than you realize too)!

Do You Understand What Credit Scores Are?

Before learning about why your score decreased, you want to make sure you have a clear understanding as to what credit scores are, why they are important, etc. Your credit score is a number that’s generally between 300 and 850. Lenders use this number in order to better understand the risk they face with you as a borrower. This is known as your creditworthiness.

Your credit score doesn’t just come from nowhere. Credit bureaus (also known as credit reporting agencies) use information found on your credit report to calculate your score. There are three major credit bureaus which are Tranunion, Equifax, and Experian. Your report has information about your credit accounts like your payments, balances, etc. When calculating your score, credit reporting agencies will use a scoring model in order to determine how each item on your report will play a part in your score.

There are two main scoring models. There is the FICO model and the VantageScore model. The scoring model varies depending on the credit bureau. However, the FICO model is more common since it is used by 90% of top lenders.

What Score Do You Have?

The rank of your credit score will depend on the scoring model that is used by the credit reporting agencies. For the popular FICO score:

  • Poor (credit scores between 300 and 579)
  • Fair (credit scores between 580 and 669)
  • Good (credit scores between 670 and 739)
  • Very Good (credit scores between 740 and 799)
  • Exceptional (credit scores between 800 and 850)

However, the VantageScore model has different rankings. According to the VantageScore model:

  • Very Poor (credit scores that are between 300 and 499)
  • Poor (credit scores that are between 500 and 600)
  • Fair (credit scores that are between 601 and 660)
  • Good (credit scores that are between 661 and 780)
  • Excellent (credit scores that are between 781 and 850)

What Can Impact Your Credit Score?

It’s important to understand what factors can impact your credit score. Due to the fact that the FICO model is more popular, that is what we will be using as reference for the factors below. There are 5 factors that can affect your score. These factors include:

  • Payment History
  • Credit Usage
  • Length of Credit History
  • Hard Pulls
  • Credit Variety

Payment History

The biggest factor on this list is your payment history. This factor accounts for 35% of your score, but that shouldn’t come as a surprise. Since lenders use your credit score to better understand your creditworthiness, your payment history can help them understand this better. This would include information like your on time payments, late payments, and more.

Credit Usage

When people think of credit usage, they may not think of their credit utilization ratio. This ratio looks at the amount of credit you are using compared to your overall credit limit. For example, if your overall credit limit is $1,200 but you are currently using $900 then your credit utilization ratio would be 75%. This factor accounts for 30% of your score.

Length of Credit History

Another important factor to consider is the length of your credit history. This is also known as the age of your credit. While this factor may only account for 15% of your score, it is still something to be mindful of. This would include details about your credit accounts like the age of the newest one, the age of the oldest one, etc.

Hard Pulls

Hard pulls are another name for hard inquiries. There are two types of inquiries when it comes to your credit. There are soft inquiries and there are hard inquiries. While soft inquiries cannot damage your credit, hard inquiries can. That’s because hard inquiries allow lenders to get an in-depth look at your credit file in order to determine your eligibility. Hard inquiries need written permission from the consumer and account for 10% of your credit score.

Credit Variety

Finally, last but not least on this list is your credit variety. Many people don’t realize that there are different types of credit accounts that can impact your score. There are two main accounts! There are installment loans and revolving credit. This factor accounts for 10% of your credit score just like hard pulls.

How to Check Your Credit Score?

If you want to know your credit score standing there are plenty of different ways that you can check your score. You can:

  • Use a Third Party App
  • Check with Your Card Issuer
  • Get in Touch with a Credit Counselor

Use a Third Party App

As technology advances, so do the ways that people can check their credit score. There are apps like Credit Karma, Mint, and more that allow users to get a peak at their score. Not only do these apps allow people to check their score, they may even provide additional services that help people manage and monitor their finances!

Check with Your Card Issuer

Another easy way to see your score is by checking with your card issuer. For example, Capital One has an online platform for users to use. On this platform, they allow people to easily check their credit score. Your card issuer will likely have something similar that allows you to see your score.

Get in Touch with a Credit Counselor

Credit counselors are trained and certified individuals that work at credit counseling agencies. Credit counseling agencies are typically non profit organizations. Their goal is to help consumers with a variety of personal finance issues like debt management, credit, and more.  A credit counselor can help you check your score and better understand your credit as well.

Notice Your Credit Score Drop?

Now that you have a better understanding of your credit score, you can begin to learn how to manage your score. You may have noticed that your credit score decreased from when you last checked it or you may notice that it’s lower than you thought it would be. If that’s the case, then you will want to make sure that you know why that happened. This knowledge can help you correct the issue! It’s important to keep in mind that everyone is different and an online article cannot tell you exactly why your score in specific decreased. Instead, we will show you common examples of ways that people can lower their score. These examples may be applicable to your situation!

Why Did My Credit Score Drop?

There are plenty of different reasons that can cause a credit score to be lower. When reviewing these different examples, you will want to keep in mind the factors that can impact your score that we mentioned above! Some of the reasons that your score could decrease includes:

  • Late Payments
  • Too High of a Credit Utilization Ratio
  • Lower Credit Limit
  • Closed Credit Card or Paid Off Loan
  • Hard Inquiry
  • Errors on Your Credit Report

Late Payments

When you are not up to date with your payments, your credit score can seriously go down. In fact, if you have a perfect credit score but are 30 days late on a payment then your score could decrease by up to 100 points! Yeah, that’s a lot. Even if you don’t have a perfect score, you can expect to see some serious damage. If you have missed payments all together and don’t even try to repay the debt then the account may get sent to collections. Once you have a collection account on your credit report then you can expect a score decrease of up to 110 points!

Too High of a Credit Utilization Ratio

Remember, your credit utilization ratio looks at your overall credit limit compared to how much credit you currently use. If your credit utilization ratio gets too high, then that can hurt your score. A good guideline is to keep your credit utilization below 30%.

Lower Credit Limit

Let’s say your overall credit limit was $2,000 but your credit card issuer reduced it to $1,200. If you were currently using $800 then your credit utilization was 40% with a credit limit of $2,000. However, after your score decreased, your credit utilization would be 66% which is much higher. This can result in your score decreasing since it’s further away from that 30% recommendation.

Closed Credit Card or Paid Off Loan

Regardless of whether you close a credit card or pay off a loan, these actions impact the age of your credit, your available credit balance, and more. For example, let’s say your oldest credit card was 10 years old, and your second oldest credit card was 5 years old. If you close down the 10 year old credit card account, then that means the oldest active account you have is just 5 years old.

Hard Inquiry

Like we said earlier, a hard inquiry is needed in order for lenders to get the in-depth look they need to determine the eligibility of a borrower. For example, lenders would need to submit a hard inquiry if a borrower is trying to get a new line of credit. However, these inquiries can result in a negative impact on your score by up to 5 points. It’s important to make sure you don’t rack up too many of these and submit too many hard inquiries at once.

Errors on Your Credit Report

Nothing is perfect in life. That same saying is true when it comes to your credit report. Luckily, under the Fair Credit Reporting Act (FCRA), credit reporting agencies must make sure the information on a consumer’s credit report is accurate. That means if you find an error on your report, you can submit a dispute with the credit bureaus. The credit bureaus will then review the dispute to see if the item is actually inaccurate. If it’s found to be invalid, it will be removed from your credit report which can also get rid of the impact it has on your score!

Common Questions

There are common questions that come along with understanding why your credit score can decrease. Many people have had questions that you may have too!

Can You Improve Your Credit After a Credit Score Drop?

Yes! Luckily, there are plenty of ways that you can improve your credit depending on the reason for the credit score drop. For example, if your credit utilization ratio is too high, then you can work on paying down your credit. The way to improve your score will vary on the issue you are dealing with. That is why it can be helpful to get in touch with a professional like a credit counselor. They can provide you guidance on handling your specific credit situation.

Why Did My Credit Score Drop?

You can see your credit score drop for a number of reasons like:

  • Late Payments
  • Too High of a Credit Utilization Ratio
  • Lower Credit Limit
  • Closed Credit Card or Paid Off Loan
  • Hard Inquiry
  • Error on Your Credit Report

When Do Items Fall Off Your Credit Report?

An important part to keep in mind when it comes to negative items that can impact your score is that they may fall off your credit report:

  • Hard inquiries fall off after 2 years
  • Late payments fall off after 7 years
  • Foreclosure falls off after 7 years
  • Short sales fall off after 7 years
  • Collection accounts fall off after 7 years
  • Chapter 13 bankruptcies fall off after 7 years
  • Unpaid taxes fall off after 7 years or can stay on there indefinitely
  • Unpaid student loans fall off after 7 years or can stay on there indefinitely
  • Chapter 7 bankruptcies fall off after 10 years

Bottom Line

Your credit score is a number that’s generally between 300 and 850. Lenders use this number in order to better understand the risk they face with you as a borrower. This is known as your creditworthiness. Your credit score doesn’t just come from nowhere. Credit bureaus use information found on your credit report to calculate your score. Your credit report has information about your credit accounts like your payments, balances, etc. When calculating your score, credit bureaus will use a scoring model in order to determine how each item on your report will play a part in your score.

You may have noticed that your credit score decreased from when you last checked it or you may notice that it’s lower than you thought it would be. If that’s the case, then you will want to make sure that you know why that happened. This knowledge can help you correct the issue! Some reasons that people can see a credit score decrease includes:

  • Late Payments
  • Too High of a Credit Utilization Ratio
  • Lower Credit Limit
  • Closed Credit Card or Paid Off Loan
  • Hard Inquiry
  • Error on Your Credit Report

However, your situation may be different. That is why you could benefit from a professional like a credit counselor. Credit counselors can give you guidance on your credit situation to help you make the best decision possible and get a good credit score.

Article References

https://www.equifax.com/personal/education/credit/score/what-is-a-credit-score/

https://www.debt.org/credit/report/scoring-models/

https://www.ficoscore.com/about

https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/

https://www.experian.com/blogs/ask-experian/how-do-you-check-your-credit-score/

https://www.nerdwallet.com/article/finance/late-bill-payment-reported

https://www.lexingtonlaw.com/education/does-paying-collections-improve-score

https://www.nerdwallet.com/article/finance/30-percent-ideal-credit-utilization-ratio-rule

https://www.experian.com/blogs/ask-experian/how-many-points-does-an-inquiry-drop-your-credit-score/

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