Have ever checked your credit score, only to wonder, “Why did my credit score drop for no reason?”
Today, I’m going to help you diagnose what happened by sharing eight reasons why your credit score may have dropped for seemingly no reason.
What are the 5 Components of a Credit Score?
Before I dive into all of the things that might be lowering your credit score, let’s just take a second to review what your credit score is based on. There are five factors that go into calculating your credit score:
- Payment history: Whether or not you make regular on time payments is 35% of your FICO® score, making it the biggest factor in determining your credit score
- Credit usage: Also called “credit utilization,” this refers to how much of your available credit you are actually using. It is 30% of your FICO® score, making it the second most important factor in deciding your credit score.
- Age of credit accounts: This includes the age of your oldest credit account, the age of your newest credit account, and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores. It makes up 15% of your FICO® score.
- Credit mix: People with high credit scores often carry a diverse portfolio of credit accounts, such as car loans, credit cards, student loans, and mortgages. Credit scoring models consider the types of accounts and how many of each you have as an indication of how well you manage a wide range of credit products. Credit mix makes up 10% of your FICO® Score.
- New credit inquiries: The number of credit accounts you've recently applied for and opened, as affects 10% of your FICO® Score.
Ok, now that we’ve covered that, let's get back to our main question, “Why did my credit score drop for no reason?”
1. Paying late or missing payments
I’m starting with the biggest and most obvious factor. If you’re late with payments or miss payments altogether, you’re essentially telling creditors that you can’t make payments on time, and your credit score is going to take a hit..
To maintain a good credit score, always make the minimum payment. Ideally, pay in full each month.
If you miss a payment by 30 days or more, call the creditor immediately. Arrange to pay up if you can and ask if the creditor will consider no longer reporting the missed payment to the credit bureaus.
Of course, you may be wondering, “Why is my credit score going down if I pay everything on time?” Well, there are a few other reasons why your credit score may have dropped.
2. Using too much credit
Remember factor #2 in determining your credit score — credit usage? Using too much of your available credit balance is going to signal that you’re overextended and could have trouble paying your debts in the future.
Your credit utilization is calculated both on a per card basis and across all of your cards. So if you have Card A that has a limit of $6,000 and Card B that has a limit of $4,000 your total available credit is $10,000. You want your credit utilization to stay below 30%. Don’t use more than $3,000 total and no more than $1,800 on Card A or $1,200 on card B.
If you are putting a big lump sum on your credit card that is going to put you over the utilization ratio, an easy hack to minimize any hit to your credit score is to make payments throughout the month. That way, your available balance stays high even if your spending says the same.
3. Closing (or losing) an old credit card account
If you're thinking, “Why did my credit score drop for no reason?” closing or losing a credit card account could likely be the problem. Closing an old credit card negatively affects two of the five factors that make up your credit score: credit utilization and credit history.
Not only does closing a credit card reduce your available credit — meaning that if you don’t also reduce how much you spend, your utilization goes up — but it also shortens your credit history, and lenders are like your World War I-obsessed uncle. They love a nice, long history.
Sometimes, if you don’t use a credit card for a while, the company may close your account. So, make sure that you use your old credit cards once in a while, and only close an old account if it’s one you never use AND it requires an annual fee.
4. Requesting too many new lines of credit
If you’re requesting a new loan of any kind — mortgage, student loan, car loan — then you may notice a drop as you apply for new loans or lines of credit.
New credit includes:
- the number of recently opened accounts (and the percentage of new accounts compared with the total number of accounts)
- the number of recent credit inquiries
- how long it's been since new accounts were opened or credit inquiries were made
Every hard inquiry affects your credit score, whether you get approved or not. This is usually a temporary dip in your credit score of about 10 points.
5. Not having a variety of credit types
Lenders like to see a variety of accounts. The different types of credit that might be part of your credit mix include credit cards, student loans, automobile loans, and mortgages. Having a variety of credit types improves your score because it signals that you’re an experienced borrower.
Keep in mind that credit mix might have a larger impact on your credit score if your credit history is short.
6. Having bad remarks on your credit report
Foreclosures and bankruptcy are two things that can cause a real ding to your credit score. Unfortunately, this could have a negative effect for years to come.
7. An error on your credit report
It’s important to check your credit report for errors. Some mistakes are simple mistakes like a misspelled name, address, or accounts belonging to someone else with the same name. But other errors are costlier, such as:
- accounts that incorrectly are reported late or delinquent
- debts listed twice; closed accounts that are reported as still open
- accounts with an incorrect balance or credit limit
Federal law allows you to dispute inaccurate information on your credit report. There is no fee for filing a dispute. You may submit your dispute to the business who provided the information to the credit reporting company and/or to the credit reporting company who included the information on your credit report.
The Federal Trade Commission's website has information about how to dispute errors on credit reports, and the Consumer Financial Protection Bureau's website provides additional guidance about disputing information on credit reports.
8. A reduced credit limit
If you haven’t already figured it out, credit utilization can really trip you up. If you haven’t used a credit card in a while or your credit has changed, then the company may lower your credit limit, which — you guessed it — means that the percentage of available credit you’re using goes up, even if your spending hasn’t changed.
If you’ve noticed your credit limit has dropped, contact your creditor and see if you can get it raised again.
If you need some help improving your credit score, download our free Credit-Boosting Checklist. This list will walk you through seven steps to improve your credit score, provide some motivation to stay focused on your financial goals, and make sure that you’re taking care of yourself. (Because that’s really the point of all this, right?)