Why Did My Credit Score Drop?

Below are some common reasons you might see a credit score drop.

1. Missing a monthly payment. Experts agree that paying your bills on time has the greatest effect on your credit score.^6,7 Based on sample credit score examples from FICO, a person with very good or excellent credit will likely see a bigger drop in their score for a missed payment than someone with a fair credit score.⁸ That’s because for a person who pays their bills on time, missing one is considered more significant than for a person whose credit score already reflects past behavior of missed payments.⁸ But regardless of your credit score beforehand, the longer the period of missed payments, the greater the drop.⁸ Simply put, a 30-day missed payment will likely have less impact than a 90-day missed payment.⁷
2. Credit utilization ratio changes. Credit utilization ratio refers mainly to how much money you owe compared with how much you’re allowed to borrow.⁹ If you have a $10,000 credit limit and carry a $2,500 balance, then your utilization is 25%. Experts suggest keeping your credit utilization ratio to no more than 30%.¹⁰ Carrying a balance that pushes the upper boundary of your credit limit – perhaps you used your credit card for a big purchase or opened a loan – increases your credit utilization, which, in turn, can lower your credit score.
3. You closed a credit card account. What a relief to pay off that credit card balance, right? Right, but many experts advise keeping that account open if you're not paying a monthly fee on the account.¹¹ Closing it may reduce the overall length of your credit history or decrease the average age of your credit accounts, which makes up 15% of your FICO score.¹² And with a smaller total credit limit, your credit utilization rate could rise.
4. You paid off a major loan. This may seem counterintuitive: Paying off installment debt – like a car loan, student loan, or mortgage – boosts your overall financial health. But it may also lower your credit score for the same reasons explained in No. 3.¹² Your credit mix and credit utilization will also change.¹³ However, the impact to your credit score will likely be small, so when you’re ready to pay off a major loan, consider doing so.¹³ Otherwise, you’ll pay extra interest charges just to keep your credit score a few points higher.
5. You recently applied for new credit. When you apply for a new credit card, the card issuer will pull your credit report to see your history and assess your creditworthiness.¹⁴ Lenders do the same when you apply for a mortgage or a car loan.¹⁴ Such a “hard inquiry” can lower your credit score, but generally factors into your credit score for only one year.¹⁴ Of note, multiple hard inquiries within a certain time period for a home or auto loan are generally counted as one inquiry.¹⁴

It might seem as if your credit score dropped for no reason. But something probably did change – whether the direct result of your actions or an event beyond your control. Here are some possibilities:

1. A decrease in credit limit. A lender may lower a person’s credit limit if they use their credit card too much or not enough, their credit report suggests they overextended their lines of credit, or the lender is trying to lessen its exposure during an economic downturn.¹⁵ A decrease in credit limit could also create an increase in a person’s credit utilization ratio, which, in turn, may lower their credit score.¹⁵
2. An account goes to collections. Generally, if a person misses three or more monthly payments in a row, a creditor may send their remaining balance to a collection agency to get paid.¹⁶ Adding a collections agency to a credit history that's already lowered due to missed payments is less than desirable.¹⁶ The more recently a collection appears on a person’s credit report, the greater it may affect their credit score.¹⁷ Collections involve outstanding debt, so it is possible that certain items that don’t ordinarily appear on a credit report will appear once a collection agency becomes involved.¹⁸ Examples may include unpaid parking tickets, utility bills, cell phone bills, and child support.¹⁹
3. Identity theft. About one in five Americans have experienced identity theft in one form or another, according to the U.S. Department of Justice.²⁰ Criminals may run up a person’s credit card balances, which then adversely affects their credit utilization ratio. However, many credit card issuers offer fraud protection and zero liability to protect their cardholders.²¹