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If you are keeping a good handle on your finances, and your FICO credit score suddenly starts taking a nosedive, you might start to panic.
You haven’t made any recent changes to your credit file in the way of opening new accounts or maxing out your credit cards. So why did your credit score decrease?
Before you immediately jump to the assumption of fraud, take a close look at all the aspects of your credit accounts. Sometimes small changes such as reported statement balances or credit limits can have a big impact on your credit score.
Reasons Why a Credit Score Drops
How can your FICO score drop if there are no major changes to your credit?
Well, just because you didn’t make any major changes to your credit accounts, doesn’t mean that there were zero changes made by the credit bureaus to your credit reports.
The thing is, your credit report is updated every month with your payment history, credit account details, and more. Usually, this reporting works in your favor to boost your credit score, but that is not always the case.
Things like an increase in credit card debt or paying off a personal loan (or car loan) can significantly impact your credit score in a negative way.
Below are 8 possible reasons your credit score could see a decrease.
1. Your Credit Utilization Increased
Your credit utilization ratio is a huge part of your score. It makes up 30 percent of your overall credit score.
On revolving debt, the credit utilization ratio is calculated by adding together all of the balances on each of your credit cards and dividing that number by the total of all of your credit limits on those cards (your available credit).
For example, let’s say you have 3 credit cards, each with a credit limit of $2k. The balance on the first is $500, $300 on the second, and only $50 on the 3rd. So your total credit card balance due of $850 divided by the $6k in available credit, equals a credit utilization rate of 14%.
When this credit utilization ratio/rate increases, your FICO score goes down.
If you pay your credit card accounts in full every month, you may be wondering why you even have a balance reporting.
That is because the credit card companies report your statement balance as your utilization each month. So even if you have the $850 paid off before accruing any interest, the balance gets reported to your credit profile anyways.
Credit utilization is rarely ever exactly the same each month, and the fluctuations in this rate/ratio are the most common factor behind small credit score drops and increases.
2. Your Credit Limit Decreased
Another way your credit utilization can be affected is with changes in your credit limit. Usually, changes in credit limit are increases, and these increases actually decrease your credit utilization rate, thereby increasing your score.
But what if your credit limit(s) decreases?
Well then your credit utilization rate goes up and your score goes down.
Let’s use the same $850 balance as above, but decrease the overall credit limits to $4k. This increases the credit utilization rate to 21%. This increase could cause a sizable point decrease in your credit score.
But why would your overall credit limit decrease?
The most common answer would be that you recently closed an account. Closing an account will retain the payment history of the account on your credit report, but will remove the credit limit.
It is also possible that the credit card company decreased your limit. This can happen because you moved your account to a different type of credit card or because you opened a new credit card with them and they transferred part of your limit to the new card.
Very rarely will the card issuer lower your credit limit as punishment for failure to make monthly payments on time.
Also, consider that sometimes a lender advises you to call the bank and lower the credit limit on one or more of your accounts to appear more favorable on a home loan application. Just be aware of how this affects your credit utilization before you do it.
3. A Recent Hard Inquiry
A hard credit inquiry is generated when a lender performs a credit check to see if you qualify for the credit line you applied for.
Most often this occurs when you are trying to open a new credit card or loan.
One or two hard inquiries aren’t too bad, but the more hard pulls of your credit that you have on your report, the more your score is going to be dinged by them.
While credit inquiries only make up a small portion of your score (10 percent), once you receive a hard inquiry it will stick around for 2 years. So if you don’t need that new credit line right now, then consider postponing the credit application.
There is some good news for those shopping around for favorable mortgage rates or auto loan rates, the credit scoring model will often lump these multiple inquiries into one hard pull so long as the inquiries all take place within a certain timeframe, i.e. 45 days.
So if you’re shopping around for a loan, consider planning ahead.
A hard inquiry can also be the result of a credit limit increase request. While many credit card companies offer a soft pull for credit limit increases, they can choose to use a hard pull. So be sure to read the fine print before asking for a credit limit increase.
4. Inaccurate Information on Your Credit Report
If your good credit score recently decreased even though you haven’t made any changes to your credit lines, then your first concern is probably fraud.
This is a good time to pull your own credit report and verify the information that is on there. If you find credit lines that you didn’t take out or hard inquiries for products you didn’t apply for, then you might need to look at reporting fraud and opening a dispute.
If the account is yours, but the information is incorrect, i.e. your credit card is showing a missed payment when you have proof that the payment was made on time, then you’ll want to call the lender and get them to fix it.
Inaccurate information isn’t always fraud or done with malicious intent, the employees at the banks and credit reporting companies are only human. An inquiry with the lender or dispute with the credit reporting agency is usually all that is needed to fix the inaccuracy.
Just be aware that the fixes won’t be instantaneous, it takes time for the changes to be reflected on your report and your FICO score. So you might want to temporarily hold off on applying for any new credit lines.
5. You Closed an Account
Unfortunately, closing an account can ding a good credit score, although this dip is usually temporary.
Closing an account can hurt the credit utilization, length of credit history, and credit mix portions of your score.
Credit utilization is based in part on credit limits. Closing an account, especially a revolving account, reduces your available credit and increases your credit utilization rate. This can decrease your credit score.
When it comes to length of credit history, the two most important factors are your oldest account and the average age of all of your accounts.
So while closing a newer account might actually improve your score, closing one of your older accounts, or worse, the oldest account, will damage your FICO credit score. And the only fix is to wait for your remaining accounts to age.
The types of credit or credit mix portion of your score is most often dinged when you’ve paid off a loan.
With revolving accounts, you usually have to contact the bank to initiate closure on the account. When an installment loan (i.e. student loan) is paid off, it is automatically closed. And if this was the only installment loan on your report, then your credit score will take a hit.
Accounts that build credit include student loans, mortgages, secured credit cards, and more. Try keeping a minimum of 3 revolving accounts and 1 installment loan open at all times to achieve the best mix of credit.
6. Missed Payment
While I have previously mentioned this in other articles, it merits saying again; missing a payment is the single worst thing you can do to a good credit score.
Payment history makes up 35 percent of your credit score. That is a huge chunk.
And just one missed/late payment can have a huge impact on this portion of your score. In fact, just one 30 day late payment can drop your score by more than 80 points. Check out this scary credit score change scenario breakdown from My FICO to put things in perspective.
If you missed a payment, make sure to get that amount paid ASAP. The longer you leave the payment overdue, the worse it will be for your credit score.
If there were extenuating circumstances leading up to the missed payment, you may be able to negotiate a good faith credit adjustment with the lender. This is where they ask Experian, TransUnion, and/or Equifax to remove the late payment from your credit record.
If the missed payment is an error in reporting or fraud, then you’ll want to file a dispute immediately to prevent this information from permanently damaging your credit score.
7. Negative Remark on Your Credit Report
With the exception of late payments, negative and derogatory marks are usually something you know about well in advance.
Derogatory marks can include bankruptcies, tax liens, foreclosures, collections, debt settlement, and more.
You may have thought your late mortgage payments were reflecting the worst that was going to happen to your credit score until the record of the foreclosure hit and lowered your score even further.
If you’ve been unfortunate enough to acquire one of these negative marks, you may have difficulty trying to repair the damage to your FICO score. These marks can stay on your credit reports for 7+ years.
8. You Opened Up a New Account
Opening a new account is a double-edged sword when it comes to your credit score.
On one hand, there is the potential decrease in credit utilization, beneficial impact to your credit mix, and continued improvement to your payment history.
But, the other areas of your credit score will likely take a hit.
Your length of credit history will be dinged since the new account will decrease your average age of account. How much this dip will be depends on the number of other open accounts you have as well as their ages.
The new credit part of your score will also likely take a hit thanks to the hard pull of your credit. Almost all banks perform a hard pull for a new credit line unless specifically advertised otherwise, such as with a credit builder loan.
And it is important to note that it may take a while for your new credit line to appear on your report which can result in a change to your score well after the account was opened.
For instance, you may have thought the initial dip in your score (for the hard credit inquiry) was it, but when the full account information is reported (usually a month or two later) your score takes a hit again for the decrease to your average account age.
Managing The Changes
Credit scores fluctuate constantly, which can be frustrating when you are trying to improve your credit.
While it’s important to keep an eye on your credit reports and credit scores, you should also try not to sweat the small weekly/monthly credit score fluctuations. Oftentimes, achieving that excellent credit score is just a matter of patience.
Amanda Garland is a personal finance blogger living in Dallas, TX. 10 years ago she was living paycheck to paycheck and knew nothing about how credit works. She learned some hard lessons in her fight for financial stability. Now she has a friendly competition going with her husband to see who can reach a credit score of 850 first. She is also a poet, having obtained a Bachelor of Fine Arts degree in Creative Writing.