Why Did My Credit Score Drop? 6 Ways to Fix It Fast

Your credit score could decline for various reasons, including missed payments or late payments, applying for new credit cards, changes to limits or usage patterns, etc. To understand why did my credit score dropped, it’s essential to comprehend all the factors. The payment history of your credit has the most influence on your score being followed by the accounts for debt and the duration of your credit history.

There are additional factors, too, that can impact your credit score, like incorrect information on your credit reports. Find out seven common reasons for a credit score drop and how you can improve your credit score if it’s recently decreased.

Why Did My Credit Score Drop? 7 Reasons

1. You Have Late or Missing Payments

Your payment history is the cornerstone of the FICO Score used by most top lenders as part of their credit scoring systems. Your payment history 35% of your score, and any missed or late payments could have a negative effect. Therefore, all payments must be on time.

If you’re over 30 days late on a due date, credit card issuers are likely to declare the late payment to at least one of the three credit bureaus, which will result in a drop in your credit score. When a payment becomes either 60 or 90 days late, due will have a more significant impact on your credit score.

If the delinquencies remain unpaid, the creditor might send your debt to an agency, which will be listed in your credit file. The records of your payment failures and late payments are kept on your credit report up to seven years, and a positive payment history for an open account can be kept on file for an indefinite period (or 10 years if your account is closed and in good financial standing).

Also read: 3 Essential Steps How Credit Score Helps to Young Entrepreneurs

2. You Recently Applied for New Credit

If you apply for a new credit, the lender will ask for an account of your credit history to evaluate your creditworthiness. They decide whether or not to credit you based on aspects like your payment history, your credit utilization, and the kinds of accounts you are a part of.

If you allow an individual other than you, for example, a lender, to verify your credit report and the hard inquiry will be reported on your credit report. This might impact your score. If you make an application for excessive amounts of credit within an insignificant amount of time, this could negatively affect your score and impact the chances that lenders allow you to apply for new credit.

Depending on the number of inquiries you’ve already had, A new hard inquiry can result in a drop in your credit score in the short term, but only for a short time. The impact of a credit score is likely to be gone in about a year.

3. Your Credit Utilization Increased

The credit limit you have set on your card, or reaching your limit, could result in a swift decline of your credit rating. According to your credit card’s limit, making an expensive purchase, or simply adding to the balance on your card, can raise the percentage of credit-to-debt, which is the second important aspect in formulating your FICO (r) Score. A higher credit utilization ratio can signal to lenders that you’re overextended, and in financial terms, it is not a good time to take on more credit.

You can calculate your total rate of utilization by adding up all your credits on your credit cards at any one moment, and then dividing that amount by your total credit limit.

Credit scoring models evaluate the total credit usage across credit cards, in addition to each card’s utilization ratio. Try to maintain your credit utilization ratio under 30%, and for the highest score, lower than 10 percent. If your total credit limit $10,000, make sure your balances are under $3000 at all times to keep your score in good order.

4. One of Your Credit Limits Decreased

A credit card issuer could reduce your credit limit due to various reasons, for instance, when you’ve used the card less frequently or used the card to spend more than the limit. When one or more of your credit limits is reduced, it could increase the credit utilization ratio and negatively affect your credit scores.

Imagine this scenario: If your credit card limit were $10,000 and you had an outstanding balance of $3,000, the utilization ratio would reach 30 percent. When a credit-card company reduced the limit to $6,000, however, your balance remained the same, and your utilization rate could increase to 50 percent. Although you didn’t have to charge to pay a larger amount and your credit utilization ratio rose. This, in turn, could make your credit score fall.

Credit card issuers determine their initial credit limits based on the following factors:

• Income
• Ratio of debt-to-income
• Credit history
• Credit score

You could apply for a credit limit increase from the issuer you currently have or create a new credit card if you’re worried about your limit being small. However, when your limit has recently gone down, an increase could be a challenge to get. It’s wise to delay requesting more credit until your score improves.

5. You Closed a Credit Card

The process of closing a credit card can affect your credit score, particularly if it raises the ratio of your credit utilization. When you cancel the credit card account, you decrease the amount of revolving credit, which could result in a rise in your utilization (particularly in the case of large balances on other credit cards).

Shutting down a credit card that you’ve had for a long time may also shorten the average age of your credit and could impact your credit score.

The duration of the credit report is accounted for as 15 percent in your FICO (r) Score. A longer history will improve your scores. Be aware that even when you have a closed account with good standing (meaning that you have made all of your payments on time), it may remain visible on your credit record for as long as 10 years, and help to build positive credit history in the period.

If the card does not have an annual cost that is high or encourages you to go overboard, it is advisable to maintain the credit card open to ensure that you have a credit limit and a length of credit history.

6. There Is Inaccurate Information on Your Credit Report

Monitoring your credit report regularly is among the best ways to ensure that no false information appears on your credit report. Though it’s uncommon, mistakes occur, and it’s possible that inaccurate data on your credit report — such as a faulty payment history– could make your score drop.

If the information you have in your report is incorrect, this could be the result of a loan provider not reporting the correct data. It could also indicate that you’ve been a victim of fraudulent identity. You are entitled to challenge information that you don’t know or suspect is fraudulent. If you find something that you think is incorrect, you can contest the details by contacting all 3 credit agencies.

Also read: How to Reduce Your Credit Card Processing Fees

How to Improve Your Credit Scores After a Drop

Here are some ways you can boost your credit score.

• Pay your bills on time. This is one of the most essential actions to maintain and build an excellent credit score. The best method is to set automatic payments and ensure you don’t forget an invoice. Ensure you have enough cash in your bank account to avoid an overdraft.
• Minimize overall debt. If possible, avoid using credit to purchase items that you aren’t able to pay in cash or pay off until the close of the month. So, your payments are manageable, and keep your credit utilization ratio to a minimum. The goal is to reduce your credit card balance to zero at the end of the month.
• Check your credit frequently. Routinely checking your credit score can help detect any dips in your score quickly and correct your course should you need to.
• Avoid applying for unnecessary credit cards. Not only do certain cards come with expensive annual fees, but a large number of cards could cause more spending than you can manage.
  Adopt spending habits. Plan your budget–even one that focuses your spending into several buckets, and doesn’t require extensive maintenance, can help you to stay within your spending limits in the long run.

Ending Point

A decline in your credit score could be a stressful experience; however, it doesn’t need to last forever. There are many ways to get your score back up and prevent further decline in the near future.

For a personalized explanation of the factors that caused the credit rating to fluctuate and advice on ways to use credit to improve your score, review your credit score online for no cost. Keep in mind that credit scores change over time, and you can increase your score by changing your personal behavior. It’s an empowering fact that you can apply in other areas of your financial life as well.

FAQs: Why did my credit score drop?