Why Did My Credit Score Drop?

Credit scores are extremely fragile, and it’s not uncommon for them to drop suddenly. Here are a few reasons why your score is unexpectedly lower.

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Adam Moelis
Jun 9, 2022
10 min read

It’s a good idea to periodically check in on your credit score from time to time. By doing so, you’ll have a better understanding of your current financial situation, you can see what lenders see on loan applications, and you can check for any inaccuracies or mistakes. You shouldn’t underestimate the power of your credit score. It has a more significant impact on your life than you might think.

Monitoring your new credit score will give you a sensation that’s kind of like riding a roller coaster. There are going to be times when your score goes up, and there are going to be times when it drops. It’s important to understand that these drops are perfectly fine and totally fixable with the right financial moves. 

7 Reasons Your Credit Score Drops

  1. You missed a scheduled payment. 
  2. You’re using more credit than usual. 
  3. Your credit limit has been reduced. 
  4. You’ve closed a credit account. 
  5. You've applied for a new line of credit. 
  6. You recently paid off a loan. 
  7. There was a mistake in your credit report. 

It’s hard not to have a sinking feeling in your stomach when you see that your score has dropped since the last check-in. Here are some of the possible reasons why your credit score might have dropped:

You Missed a Scheduled Payment

Payment history is the single most important factor in your credit score. Whether you make payments on time accounts for 35% of your overall score. It’s pretty simple: the longer that the payment is left unpaid, the more damage that late payments will do to your score.

Being a few days late might incur a late fee, but it probably won’t get reported to the credit bureaus. However, being more than 30 days late is enough to derail your payment history. 

It could lead to a delinquency mark being attached to your credit report that will stay there for several years. It’s possible that your score can drop by more than 100 points if your payment is more than 90 days late and sent to collections.

You should double-check all of your scheduled monthly payments and make sure the funds are delivered. The chances are that you would have received an email or notice in the mail that your payment wasn’t processed on time. It might be a good idea to enlist in automatic payments to ensure that your payments are never late.

You’re Using More Credit Than Usual

The second most important factor for your credit score is your credit utilization rate. This simple formula takes the balances on your credit accounts and divides them by your total maximum limits.

For example, let’s say that you have three credit cards with total credit limits of $500, $1,500, and $8,000. Now let’s say that you have balances of $400, $1,100, and $5,000 on your accounts. You would take your total debt of $6,500 and divide it by your total credit limit of $10,000 to calculate your credit utilization rate. In this example, you would have a credit utilization rate of 65%.

Experts suggest keeping your credit utilization rate below 30%. If you’ve recently been using your credit cards more often, you might have passed this threshold. Paying off the balances and getting under 30% should help to repair the damage to your credit.

Your Credit Limit Has Been Reduced

It’s possible that you might have surpassed the recommended credit utilization rate without making any changes to your spending. Credit card companies reserve the rate to lower the credit limit for their customers. It’s not a very common practice, but it could explain how you’ve unexpectedly used more of your available credit.

You should contact your credit card issuer to see if there have been any changes to your limit. Credit card companies only make money if you use the card that they’ve issued. There’s a chance that they’ve lowered the limit of a card that you rarely use and allocated it to another customer instead.

Along with maintaining your current credit accounts, you should also apply for new lines of credit every few years. The boost to credit limit can help reduce your credit utilization rate, and making on-time payments can help with your payment history. Ideally, you should use a credit card that gives you the strongest benefits.

You’ve Closed a Credit Account

Closing a credit account can affect your credit score in two different ways. The first way is that it will suddenly increase your credit utilization rate. As mentioned earlier, using your credit less can repair this damage. The second way is that it will affect your credit history. It’s a little bit more complicated trying to offset changes to your history.

Credit history accounts for 15% of your credit score. There are multiple things that compose your credit history, including the age of your oldest account, your youngest account, and an average of all your accounts. 

By closing an account, you’ll be lowering the average age of your accounts. A lower average age will mean a shorter credit history and a lower credit score.

For these reasons, it’s a good idea to keep your credit cards open for as long as you can. Keeping the account open is far more valuable than whatever you might gain by closing it. Unless there is a high annual fee attached to the card, it’s best just to keep it open.

You’ve Applied for a New Line Of Credit

The key to building up your credit is getting new lines of credit over time. Having another credit card or taking out a loan will establish a history of repaying your debts.

Whenever you apply for a loan or credit card, your credit report will be pulled and thoroughly reviewed. The lender will determine your creditworthiness and determine whether to accept your application or deny it. This practice is known as a “hard inquiry,” and it can drop your credit score by a few points. What’s worse is that the inquiry will remain on your credit for up to two years.

It’s completely natural to accumulate a few hard inquiries over the years. After all, you can’t build up your credit without opening up credit accounts. The majority of lenders will ignore a single hard inquiry or a few of them that are spaced out. 

However, applying for several lines of credit in a short window can have a very negative impact on your score.  Try to space out your credit applications by at least six months.

You Recently Paid Off a Loan

There are few things in life more satisfying than paying off a mortgage, car loan, or student loan. The problem is that these accomplishments might come with a sizable drop in your credit score.

Credit mix is a category that makes up 10% of your credit score. By paying off an installment loan, the variety of your debt will change. Your report might only be left with revolving credit lines such as credit cards. You’ll also be limiting your ability to maintain a positive payment history. While that won’t necessarily hurt your credit score, you won’t be building it up either.

Despite these potential drawbacks, you shouldn’t hesitate to pay off your loans if you have the money. The drop in your credit score should only be temporary, and it’s worth the freedom of having one less bill. Plus, prolonging a bill for the sake of your credit will only result in you paying more money in interest charges.

There Was a Mistake in Your Credit Report

Finding an error on your credit report is far more common than you might think. According to a recent investigation, roughly 34% of Americans have found at least one error on their credit report. That’s one of the best reasons to closely monitor your credit report. 

Some of these errors are relatively minor such as having a misspelled name or the wrong address. However, there are lots of people that have found one or more strange credit accounts on their reports. 

These individuals are most likely the victims of identity theft. The sooner that you can find a fraudulent account, the faster that it can be removed and the less damage that it will cause. 

A Safe Way To Build Your Credit

There are a lot of different reasons why your credit score can suddenly drop. The good thing is that none of them will last forever. Making a few moves can repair the damage and take your score even higher than it was before.

One safe way to build up your credit is to use the Yotta Credit Card. You can build up your credit with every swipe as Yotta reports to all three of the major credit bureaus. There’s no possibility of overspending as your limit is based on the total in your Yotta account. The Yotta Credit Card doesn’t come with any fees or interest rates and will always be made on time. It’s a win-win-win situation for you.  

These benefits aren’t even the best part. Using your Yotta Credit Card will give you the chance to win all kinds of various prizes. For example, the Lucky Swipes program comes with a 2% chance of having your next purchase paid for by Yotta. You’ll also be given an additional ticket for every $5 that you spend with your Yotta Credit Card. Each ticket comes with the opportunity to win a brand new Tesla Model 3 or a $10 million cash prize. 

Head to Yotta today so that you can open up your account and get started. You can get to work fixing the damage on your credit report and possibly become a millionaire in the process.

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