Monday, May 27, 2024

Why Did My Credit Score Drop Suddenly?

Have you ever paid off a credit card only to see your credit score go down? You’re not alone. Credit scores aren’t perfect but when we see our credit score go down for no reason, it causes stress for most people. After all, it’s not usually good to see your credit score drop.

Wanting to have a good credit score is understandable. Good credit is essential for many reasons, especially if you plan to make a big financial move like getting a mortgage.

As you try to raise your score and monitor your credit, it’s nerve-wracking to see your score suddenly drop. Seeing it decline may be a red flag to creditors, but that’s not always the case.

Our guide shares why you may see a sudden drop in credit score and what it means for your finances.

Why Did My Credit Score Drop For No Reason?

It is important to know the credit score ranges when researching a change in your score. You may still have a good score and can qualify for the best rates on a line of credit.

It’s also possible your score dropped enough to impact potential rates negatively. You can only know that if you understand what your standing means.

If you have ever asked yourself, “why did my credit score go down when nothing changed?,” it’s likely due to one of these seven reasons.

1. You Made a Late Payment

Making late payments results in a severe impact on your credit score. Lenders want their money on time, and making payments late slows down that process.

As a result, you commonly incur a late fee for not making a payment on time. Worse yet, it negatively impacts your credit score.

Late payments are a crucial issue to fix, as your payment history accounts for 35 percent of your score. Even missing a few payments can damage your score.

This even applies to missing payments to buy now, pay later apps.

The best way to fix this problem is to start paying your bills on time. Thankfully, default and late payments are at historical lows, according to the U.S. Government Accountability Office.

It’s best to commit to making at least the minimum payment to keep your credit score stable. If you can afford to make larger payments later, go for it.

However, the first step is simply to make an on-time payment.

If you have multiple bills to pay and find yourself getting confused or falling behind, consider setting up automatic bill pay, so you don’t have to think about it.

You can also try to ask your lender to lower your interest rate to reduce your payments.

2. You Made an Expensive Purchase 

Making a large purchase on a credit card will also likely cause your credit score to go down. Ideally, you only want to utilize about 30 percent or less of your credit card limit.

For example, imagine you have a card with a $2,500 limit and you make a $1,000 purchase. You’re now utilizing 40 percent of your credit limit, and your score may drop if you don’t pay this balance off in full when due.

Making huge purchases on a card is one of the easiest ways to get into debt. Try to avoid making a purchase if you can’t pay the balance off in full by the end of the billing cycle.

Save up for it instead if you’re concerned about how it will impact your credit score.

As long as you pay the bill when due, your score will quickly rebound. If your credit score is already good, don’t worry about the temporary blip.

3. A Derogatory Mark Was Added to Your Account

Another big reason why your credit score might decline is that a creditor added a derogatory mark to your credit report. A derogatory mark is not good, and you want to take care of it immediately.

Derogatory marks act as red flags to warn new lenders not to extend you a new line of credit.

Derogatory marks can stay on your report for years, but it’s possible to remove some if you ask your lender. For example, you can request to work out a payment plan for a loan that you never paid.

Some marks look worse than others, depending on their age and whether or not you tried to contact the lender to resolve the issue.

Examples of derogatory marks on your credit include:

  • Balances sent to collections
  • Repossessions or foreclosures
  • Credit and loan defaults
  • Tax liens
  • Civil judgments
  • Bankruptcies

These are all things you do not want on your credit report. To avoid this, commit to paying your bills on time and communicate with the company if you are having trouble making payments.

If you’re struggling, call the lender to see how they will work with you. That’s far better than ignoring the situation.

4. You Applied for A New Line of Credit

Opening a new line of credit can help your utilization score. However, there is always the chance it can make your credit score drop by a few points.

Whether it’s a loan or new credit card, this counts as a hard credit inquiry on your report.

A hard credit inquiry is when you apply for credit, and the lender or creditor runs your credit to check out your score or history.

Generally, hard inquiries will stay on your report for two years, and you shouldn’t accumulate too many of them at once.

Avoid applying for too many lines of credit at once. Space things out and see if you can receive a quote first without running your credit.

For example, if you are considering refinancing your mortgage and you know your credit score, ask around and compare different offers and terms before actually applying for anything.

When refinancing or applying for a mortgage, LendingTree is a great resource as it allows you to compare up to five lenders at once.

If you check rates individually with multiple lenders, over the course of a few months, you will end up with numerous hard inquiries on your credit report. That will negatively impact your credit.

If you’re trying to determine how to build credit, research your available options to ensure you’re making the best choice for you.

5. You Closed an Old Credit Card

Closing an old credit card can cause you to have a sudden drop in credit score. You may consider closing your card because you don’t want to pay the annual fee, or you just don’t use it anymore.

The reasoning may be sound, but it can hurt in the short-term. Closing an old credit card can be bad for several reasons, including:

  • Average age of your open accounts
  • Total credit accounts you have
  • Payment history
  • Your credit’s age

When you close a credit card, you lose out on that history from your credit report. If you had a high limit, kept your overall utilization low, and paid off your balance in full each month, all that good history disappears.

Taken alone, credit age makes up 15 percent of your credit score. Instead of closing it, look for other options like a no annual fee version of the card.

6. You Paid off a Car or Student Loan

Paying off your car or student loan is another reason for a credit score drop. On the surface, it’s terrific to eliminate debt, but it can also have negative repercussions.

For your credit score, however, paying off your car or student loan means that you’re closing an account. Similar to closing a credit card, paying off the debt entirely can lower your score a bit as you lose out on the positivity of on-time payments.

It also reduces your credit mix, which makes up ten percent of your credit score. Lenders like to see that you have various types of credit like a mortgage, credit cards, etc.

While it might seem like a bad thing to see your credit score drop after paying off debt, it’s not. Being debt free is far better than a short blip in your score.

7. There’s a Mistake on Your Report

The final reason why your credit score may drop is an error on your credit report. Errors include anything from a closed account showing up as open, or a debt you already paid off not reflecting as paid.

Another cause for a mistake on your credit report is fraud.

Regardless of the cause of the error, you need to check your credit report regularly. The government allows you to receive one free report every 12 months from each of the three reporting agencies through AnnualCreditReport.com.

Download each of your reports throughout the year and scan it for errors. If you find an error, contact the respective agency and work with them to correct it.

Best Options to Monitor Your Credit Score

Credit scores are not a perfect system. Some aspects of the scoring model are valid, but it also hurts those doing perfectly acceptable things to improve their finances.

If you want to keep an eye on your credit score, the best course of action is to use a tool that monitors your credit. Below are the four best tools to be in the know:

Credit Karma: Credit Karma is a free resource to watch your credit. When you create an account, Credit Karma shows you a dashboard that lists your credit score and emails you when it changes.

The dashboard shows each of the categories that comprise your credit score and why it’s at the standing it is. It also provides tips on how to improve your score.

Credit Sesame: Credit Sesame works similar to Credit Karma. The site is free to use, and it provides a dashboard to view your score and ways to improve it.

Credit Sesame offers more educational resources to help you understand credit. If this is important to you, the site is worth checking out.

TransUnion: TransUnion offers a more hands-on approach to managing your credit. The service is not for everyone; instead, it’s for people that want a more managed approach to improving and monitoring their credit.

Their Credit Wellness service is $29.95 per month, and you can cancel it at any time. The service sends your credit score monthly, ongoing tips to improve your score, and instant alerts if anyone is trying to open a line of credit in your name.

Experian: Experian is another great option you can use to check your credit score for free. You can also pull your credit report for free and see exactly where your credit stands and where it could use improvements.

*Now you can get your free Experian Credit Report and FICO® Score anytime on your android phone!

They also offer other services to help you manage your credit, such as identity theft protection plans. If you want to immediately raise your credit score, try Experian Boost.

Read our review of Experian Boost to learn more.

Bottom Line

There are many reasons why your credit score drops, and you can remedy them all. A good credit score is great to have no matter your stage of life. While not perfect, credit scores are important and can have a significant impact on our everyday lives.

Your credit score can affect where you live, what car you can get, whether your business loan gets approved, your employment status, and much more.

These are big situations that come up in life, and a good score will help the process in all of those cases.

Be sure to remain calm if you notice a drop. It might seem scary at first, but you can get to the bottom of it, and hopefully make some improvements to your score in no time.

How often do you monitor your credit score?

Choncé is a Certified Financial Education Instructor (CFEI), personal finance freelance writer, and blogger who focuses on helping others manage their money better in order to live a life with more possibilities and fewer limitations. Her work has been featured on Business Insider, LendingTree, Credit Sesame, and Barclaycard.

Related Articles


Please enter your comment!
Please enter your name here

Latest Articles