Why did my credit score drop?

Woman in a coffee shop holding her credit card and concerned about why her credit score dropped. Image: Woman in a coffee shop holding her credit card and concerned about why her credit score dropped.

In a Nutshell

A number of factors can cause your credit scores to drop. High credit card utilization, late payments and hard inquiries are just a few issues that can impact your credit health.

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Picture this: You log on to Credit Karma to check your credit scores, but instead of a steady upward climb you see something troubling. Your TransUnion® credit score has dropped for seemingly no reason.

This is a fairly common experience, and it doesn’t necessarily mean you did something wrong. A range of factors contributes to your credit scores, and some reasons for a drop are more serious than others.

Let’s take a look at six reasons why your credit scores may have dropped.

Why did my credit score drop?

  1. Your credit utilization increased
  2. You missed a payment on one of your credit accounts
  3. A derogatory mark was added to your report
  4. You closed an old credit account
  5. You paid off your student or car loan
  6. You recently applied for a new loan or credit card

1. Your credit utilization increased

Credit utilization refers to how much of your available credit you use at any given time. You can calculate your credit utilization percentage by dividing your total credit account balances by your total credit limits and multiplying by 100.

Though credit factors vary depending on the scoring model being used, credit utilization is generally considered a high-impact factor.

Why is credit utilization so important? Because it gives creditors an idea of how responsibly you use credit. Most experts recommend keeping your overall credit utilization rate at or below 30 percent. Anything higher might suggest irresponsible credit behavior and could contribute to lower credit scores.

“If someone has $20,000 [of available credit] and they run up balances too close to the limit, that fact alone [may] prompt a drop in their scores – even if the accounts are being paid on time,” says Charles Phelan, debt negotiation expert and founder of the DIY debt settlement website ZipDebt.

Is your credit utilization rate way above 30 percent? Don’t panic. There are a few things you can do to lower it. For example, you could decrease your spending, pay off some credit card debt, call your credit card issuer to request a credit limit increase or open a new credit card. Click on the link below for a full rundown of how to lower your credit utilization.

How to lower your credit card utilization ratio

2. You missed a payment on one of your credit accounts

Making a late payment on your credit card, mortgage or student loan is a big no-no. Late or missed payments can significantly affect your credit scores and overall credit health. And that’s on top of any fees you’ll have to pay.

Why are late payments such a big deal when it comes to credit scores? Think about it this way: Your credit scores indicate how likely you are to repay any debts you owe. If you’ve proven that you can’t pay one of those debts on time, that’s a potential red flag.

Even if you typically pay off all of your balances on time, just one late payment can take a serious toll on your credit scores. That’s why we recommend setting up automatic payments and email or text reminders on all of your financial accounts.

If a late payment caused your credit scores to drop, don’t be too hard on yourself. Just continue to make on-time payments on all your accounts, and you could see your credit scores begin to slowly improve. For more tips on what to do if you miss a credit card payment, check out the link below.

What happens if you miss a credit card payment?

3. A derogatory mark was added to your report

If you experienced a major drop in your credit scores, a derogatory mark could be the culprit. Derogatory items may include (but are not limited to):

  • Bankruptcies
  • Foreclosures
  • Tax liens
  • Civil judgments

If you see any of the above items on your credit reports, we recommend taking care of it immediately. Since they represent major delinquencies, derogatory items can reflect poorly on your ability to take care of your finances.

Fortunately, as of July 2017, the three major credit bureaus have removed about half of all tax liens and nearly all civil judgments found in consumer credit reports. But you’ll still want to check your reports to make sure there’s nothing to address. If you see any credit cards or loans you don’t recognize that have gone into collections, that may be a telltale sign of identity theft.

How to protect yourself from ID theft

4. You closed an old credit account

While it might be tempting to close an old credit card account, it may cause your credit scores to take a bit of a dip.

Sound counterintuitive? Allow us to explain.

The age of your credit history is one of the factors typically used to calculate your credit scores. If you close your oldest credit card account, you’re effectively lowering the average age of your credit accounts.

That’s not to say you can never close an old credit account. You just have to be a little careful about how you do it. Be aware that closing an old account may also cause your credit utilization rate to increase, as it could reduce your overall available credit.

How to cancel a credit card

5. You paid off your student or car loan

While it’s not the most important part of your credit scores, having a good mix of different types of credit and an appropriate number of open accounts can help show lenders that you have the experience to pay off debt responsibly.

If you’ve just paid off the only loan you have, your credit mix might look a little less diverse to lenders. Similarly, if your total number of accounts suddenly skyrockets or nosedives, that could indicate that you’re financially strapped and need credit or can’t afford your existing credit accounts.

Before you open or close any accounts, you may want to check your credit reports, where you can see the distribution of your open and closed accounts.

Check your credit reports now

6. You recently applied for a new loan or credit card

When you apply for a new loan or credit card, the financial institution will likely check your credit before making a lending decision. This check is known as a hard inquiry (or a hard pull), and you typically have to authorize it.

A hard inquiry could reduce your credit scores by a few points or it may have a negligible effect on your scores. Normally, a single hard inquiry isn’t something you should worry too much about. But if you’ve applied for several accounts in a short period of time, you could appear desperate for credit, and the damage from those hard inquiries might add up.

To avoid unnecessary inquiries, try to only apply for credit when you need (and can afford) it, and try to focus on cards that you have a good chance of getting approved for. If you’re a member, Credit Karma can show you your estimated approval odds. Though your Credit Karma Approval Odds don’t guarantee approval, they can help you narrow down your choices and make a more informed decision.

What your Credit Karma Approval Odds really mean

Bottom line

As illustrated above, a surprising number of factors may cause your credit scores to drop. These factors range from the serious (credit utilization, derogatory marks) to the less serious (hard inquiries).

In any case, maintaining good credit health requires consistent financial responsibility. If you always make payments on time, keep your credit utilization rate below 30 percent, and address any concerns on your credit reports as they pop up, you’re off to a great start.

Fortunately, Credit Karma can help. Log on to get your free credit scores from TransUnion and Equifax, and take advantage of Credit Karma’s Direct Dispute™ feature if you need to dispute any errors on your TransUnion® credit report.