Why Did My Credit Score Drop for No Reason?

Credit scores are calculated using a specific, clearly defined credit scoring model. So while it may appear your score dropped for no reason, it is never random. Something triggered it even though it might not be immediately obvious to you.

I will cover 10 possible reasons why your score may seem to drop without cause.

1. Missed or Late Payment

Your payment history and credit history is the single most important factor in credit score calculation. The FICO score makes up more than a third of your score’s calculation.

A missed payment can drop your score by dozens of points. Maybe you missed it after accidentally deleting an email notice or statement. Maybe it is a new credit account whose payments you are not accustomed to.

If you are just a few days late, the delay is unlikely to register on your credit report. Once it surpasses that crucial 30-day threshold though, lenders will report it to credit bureaus as delinquent.

How far your credit score drops will depend on how many days you have missed the payment. A 90-day missed payment will have a greater negative impact on your score than a 30-day missed payment. Also, the higher your credit score, the larger the drop will be.

Solution: Make the missed payments. How soon your score bounces back depends on your credit history and your response after missing the payment. The faster you get back on track, the sooner your score will start climbing back up.

2. You Recently Applied for a New Credit Card, Loan, or Mortgage

If you recently applied for a mortgage, loan, or credit card, the lender made a hard inquiry by pulling your credit report for a credit check. A hard inquiry (or hard pull) occurs when a lender reviews your credit report to see if you are eligible for a loan or a credit limit.

Hard credit checks will lead to a lower credit score albeit temporarily. (Also check out our Best Credit Building Apps here.)

Lenders judge opening multiple accounts as potentially risky credit behavior.

Solution: Shopping for the best deal is actually a good thing which is why credit scoring companies will group inquiries done within a 30-day window as a single credit inquiry. So if you want to shop for a good deal, do so within a short time to avoid inadvertently hurting your credit score.

Note that hard inquiries are different from soft inquiries. Soft inquiries do not have any impact on your credit score. These occur when you or a company checks your report but not for a lending decision. It is usually for credit monitoring or background checks. Soft inquiries are only visible to you.

3. Increase in Credit Utilization

Credit cards are a convenient mechanism for making purchases. However, a large purchase could leave a large credit card balance which will raise your credit utilization ratio. Credit utilization is what you owe on your credit card as a proportion of your card’s limit. It affects your credit score.

The Consumer Financial Protection Bureau recommends you maintain a credit utilization ratio of no more than 30%. The lower, the better. (At Digital Honey, we generally recommend less than 10 per cent.) A low credit utilization shows potential lenders you are a responsible borrower and are more likely to repay your credit card debt easily and quickly.

A change in the amount you owe can cause a significant deterioration in your score. Take time to look at your credit card purchases in the recent past.

If you have charged your cards more than usual perhaps with a big-ticket purchase (such as a family vacation or a pricey electronic), your utilization has grown, and with that comes a negative impact on your credit score.

Solution: If you have had a large purchase recently, work on paying it in full before the current billing cycle ends. Pay down the balances until you are back to utilizing a more acceptable proportion of your credit.

Alternatively, request for a higher credit limit. Find out if the lender can raise your limit without a hard inquiry.

4. Your Credit Limit Decreased

Your credit card issuer may decrease your limit without necessarily notifying you beforehand. This may be in response to something alarming on your credit report, a decline in your credit scores (hence a self-fulfilling prophecy of sorts), or due to reduced transaction activity.

When your credit limit decreases without a corresponding decrease in your balances, you will have a higher credit utilization ratio. A higher credit utilization is a negative mark and lowers your score.

Perhaps you ordinarily spend $2,000 of your $8,000 credit limit. That is a 25 percent credit utilization rate. But if your credit limit drops to $4,000, your utilization instantly jumps to 50 percent.

If your spending has not changed but your limit has been revised downwards, your utilization will go up and therefore negatively impact your credit score.

Solution: Reduce your spending to bring credit utilization back under 30 percent.

5. You Closed a Credit Card

Tread cautiously before you close a credit card you no longer use. When you pay off and close a credit card account, especially an old one, your score could be negatively affected for two reasons.

First, it reduces the total credit limit available to you. Second, when you close a credit card account, the average age of your credit history and payment history is shortened, and the average age of your accounts falls. At least 10 percent of your FICO score is based on how old your credit accounts are.

Both reasons would have an impact on your credit utilization ratio and therefore have a negative effect on your credit score. Fortunately, this decline is usually temporary and you should eventually bounce back from the initial fluctuation.

Solution: Before you close a credit card account because it has steep annual fees, talk to the card company and confirm whether you can downgrade to a card with zero annual fees. This could allow you to preserve your credit line while getting a card that is better suited to your needs.

Note: Whereas you can give a credit card company instructions to close your account, some will close your account without notifying you. The Equal Credit Opportunity Act gives creditors the power to close card accounts due to delinquency, default, or inactivity without notice.

For any other reason for account closure, the company has to give you 30 days’ notice which means you may have a closed account that you are not aware of.

6. You Paid Off a Loan

Did you recently pay off a student loan, car loan, personal loan, mortgage, or other type of installment loan? Installment loans have fixed payment schedules and terms. Paying off an installment loan may cause your credit score to drop. Shocking isn’t it? Well, blame the algo