6 Reasons Your Credit Score Could Drop

Introduction

Your credit score isn’t set in stone. In fact, your credit score updates all the time based on your financial activity, what’s reported or not reported to the credit bureaus, and which credit report is being used to generate the score — as well as which credit scoring model is doing the calculation.

Of course, even knowing all that, it can still be puzzling, frustrating, and even shocking to see your credit score suddenly drop for no apparent reason. But the truth is, even if you don’t see it right away, there’s always something that caused the change — and it doesn’t have to be as drastic as defaulting on a loan or not paying any of your credit card bills.

Small fluctuations one way or another usually aren’t anything to worry about. But if you’re trying to build or rebuild your credit score, you want it to go up — not down.

Let’s take a look at some of the biggest reasons your credit score could drop, and what to do about it.

1. You Applied for New Credit

When you apply for a credit card or loan, it usually results in a hard inquiry on your credit report. And each hard credit check will typically decrease your score by a few points, at least temporarily.

If you’re applying for car loans or mortgages, you’ll probably only see a single hard pull for multiple applications that occur within a certain period — usually two to six weeks, depending on the credit scoring model. Since you’re clearly shopping around for the best rate, you don’t get dinged for each query. But credit card applications typically trigger a hard inquiry each and every time.

These inquiries stay on your credit report for up to two years, but those within the past 12 months are most likely to influence your credit score.

What’s the solution?

Spend some time researching cards that match your financial profile to increase your odds of approval. Spread out your credit applications by at least a few months — and preferably six months or more. And always see if you pre-qualify before applying, or respond to a pre-approval offer if you have one. Both pre-qualified and pre-approved offers use a soft inquiry instead of hard, which doesn’t impact your credit score.

2. You Closed an Account

Closing a credit card could decrease your credit score in a few ways. First off, it could lower the average age of your credit accounts — especially if it was open for several years. Secondly, it could decrease your overall credit utilization ratio, especially if the card you’re closing had a higher credit limit. And finally, it may also throw your credit mix out of balance.

In fact, closing a credit card usually has more drawbacks than benefits, so always think twice before doing it.

What’s the solution?

The best plan is usually to leave older accounts open, even if you’re not using them. You might have a good reason to close one — including a low credit line or high annual fee — but generally speaking, it’s best to leave it be. Just make some regular charges to avoid having it closed for inactivity. A recurring subscription combined with AutoPay for the full balance makes a set-it-and-forget-it machine to build positive payment history.

You could also call the creditor and see if they have another card you can switch to that better fits your needs. That could be one with a higher credit limit, lower interest rate, no annual fee, or a different rewards structure that’s better suited to your spending habits.

3. Your Credit Limit Was Decreased

Closing an account isn’t the only way to lose some of your available credit. You could also find that your credit card issuer reduced your credit limit. And as long as it’s within the terms of your agreement and allowable by law, the creditor can raise or lower your credit line at any time.

A decrease can happen for a variety of reasons. It could be that you started missing payments, charging more than usual, or carrying a bigger balance. Or economic conditions could have led to higher overall risk for the creditor, causing them to cut back in general.

So this one’s a bit of a chicken-and-egg scenario. Was your credit limit decreased because your credit score dropped, or did your credit score drop because your limit was decreased? But whatever the reason, a lower credit limit usually means a higher credit utilization ratio, and therefore a lower credit score.

What’s the solution?

If your credit limit is reduced but you leave an outstanding balance or keep spending, your utilization ratio will be substantially higher. So first, pay down the debt on that card. Then, if you haven’t applied for new credit in a while, it wouldn’t hurt to see if you pre-qualify for another card to balance out the situation.

4. You Co-Signed a Loan

If you’ve tried to help out a friend or family member by co-signing their loan, your credit is partially in their hands. You’ve essentially agreed to take on full responsibility for paying that loan back if anything goes wrong.

So if the person you co-signed the loan for isn’t making their payments as agreed, you’re on the hook for the balance. This can affect your credit as much as taking out the loan yourself, and a past-due status will likely damage your credit score.

What’s the solution?

Instead of relying on trust, make sure you get access to the loan’s online account, or have statements sent to your home. That way you know the status of the loan and can nip any potential trouble in the bud. If worse comes to worst, and a defaulted loan looks possible, consider making payments yourself to avoid harming your credit.

5. A Creditor Incorrectly Reported Account Activity

Many lenders and creditors report account activity to the three major credit bureaus every month. If you pay your bills on time, it should be reflected in your credit reports. But everyone makes mistakes, so if your credit score drops despite making timely payments, the lender may have reported your account as “past due” even though it wasn’t.

That’s why it’s important to review your credit reports periodically. Under the Fair Credit Reporting Act, you have the right to receive each of your credit reports for free every year. But even better than that, you can now get them every week at AnnualCreditReport.com.

What’s the solution?

If you find an error on your credit report, it’s important to resolve it as quickly as possible. To fix a mistake, dispute it through the credit bureaus, and maybe the reporting creditor as well. Be sure to provide what information you believe is inaccurate and why. The easiest way to submit a dispute is online through the appropriate credit bureau — Experian, Equifax or TransUnion.

6. You’re a Victim of Fraud or Identity Theft

If you’ve been making your payments on time, haven’t applied for credit or closed any accounts, and don’t carry too large a balance — but your credit score still drops — you may be a victim of fraud or identity theft.

This can happen if you click on a phishing link in an email and inadvertently give up your personal information or account login credentials. It can also happen if you receive a spoof phone call and give them your personal details, thinking it’s a legitimate business or financial institution calling. And it’s not unheard of for scammers to rummage through your mail or garbage looking for personal data on your bills or government communication.

What’s the solution?

First of all, protect yourself by creating strong passwords for your online accounts. And never give out personal information unless you initiated the conversation, whether by phone or online.

Next, review your credit card statements to make sure there aren’t any unauthorized charges. If your credit card has been lost or stolen, call the creditor and get it replaced with a new account number.

Then check your credit reports for any accounts or activity you don’t recognize. If you notice signs of fraud, report it to the Federal Trade Commission (FTC) at ReportFraud.FTC.gov. If your identity has been stolen, follow the steps outlined at IdentityTheft.gov, including filling out the form to report it. You can use a copy of your report to dispute any fraudulent info on your credit reports.

Bottom Line

If your credit score drops — regardless of the reason — it’s important to take steps to improve it. Your credit health is a significant factor in lending decisions and the interest rates you qualify for. The chances of being approved for an application, while qualifying for higher credit lines and lower interest rates, are much better if you have a good credit score.

If you need to increase your available credit to lower your utilization ratio, always shop around, and see if you pre-qualify before submitting an application.