When you’re monitoring your credit scores over a longer period of time, you’re likely to run into a puzzling situation. Nothing much changed in how you handle your accounts, but your credit score changed for no reason. If this happens while you’re in the process of applying for credit cards, small business loans or other credit products, a credit score drop can be downright scary.
Here’s why and how credit scores can drop, and what you may be able to do about it.
Reasons Why Your Credit Score Can Drop
Credit scores are calculated when someone requests them — a lender, for example, or when you check your own scores. FICO and VantageScore are the two major companies that create the formulas used to calculate credit scores. These credit scores analyze information in your credit report from one of the major credit reporting agencies: Equifax, Experian, or Transunion.
The information in your credit reports can change frequently, as lenders report new information about your accounts. When you see a change in your credit scores, it’s likely directly related to one of the five main factors that impact credit scores:
Balances on revolving accounts like credit cards are often a key factor that affects credit scores. Most credit scoring models will compare the balance on each credit card to the available credit (or credit limit) on that card. High balances in comparison to credit limits can affect credit scores, and are a common reason for credit scores to fluctuate. This is known as “credit utilization” or “credit usage ratio.”
This factor can affect your credit scores even if you pay your credit cards off in full each month. That’s because most issuers report credit card balances shortly after the billing cycle on your account closes. (Your credit card statement lists the closing date of the billing cycle if you are unfamiliar with it.) That reporting date is often much earlier than the payment due date, and so it’s not uncommon for the balance reported to be different than the balance after you’ve made your monthly payment.
Payment history is an important factor that impacts credit scores. Late payments (also called “delinquencies”) that appear on your credit reports can cause your credit scores to drop significantly. Other negative items like collection accounts, charge offs or bankruptcy will also have a major impact on your scores.
A longer credit history is better. When evaluating the length of your credit history, FICO scores and VantageScores consider when your first account was opened, when the most recent account was opened and the average age of all accounts. Some scoring models will include closed credit card accounts when calculating credit age, but some may not. That means closing an account you’ve held for a long time could potentially impact this factor.
A mix of different types of credit accounts, including both revolving accounts like credit cards, and installment accounts such as mortgages or car loans. Closing or paying off certain accounts may sometimes affect this factor, even if those closed accounts still appear on your credit reports.
If you apply for credit, an inquiry will be listed on the credit report from the company the lender used for the credit check. Most inquiries have a minimal impact on credit scores (in the range of 3— 7 points), some inquiries (“soft inquiries”) don’t impact credit scores at all, and some hard inquiries (such as auto loans, mortgages or student loans) may be grouped so that similar inquiries in a short period of time count as one.
What To Do About A Credit Score Drop
If you’re working on building and maintaining good credit scores, seeing that number drop is frustrating. The first thing to do is to take a deep breath. Fluctuations in your credit scores of 10 or even 20 points are not uncommon.
That said, you always want to review a credit report from the company supplying the credit score to see if you can identify what’s changed. (If the credit score was calculated based on Transunion credit data, for example, then review your Transunion credit report. Each of the three major credit bureaus may have different information.)
If nothing major happened recently— you weren’t late, or you didn’t close an account, for example— then it may be a normal fluctuation that will adjust in the next month or two. Sometimes it’s easiest just to continue to monitor your credit while paying your debt on time and keeping balances low.
If you find information that doesn’t belong to you, it’s possible you’ve been a victim of identity theft. You should immediately look into reporting ID theft and consider placing a fraud alert or credit freeze on your credit reports.
Ways To Improve Your Credit Score
The steps you need to take to improve your credit scores will depend on what’s bringing down your scores. Each person’s situation will be different.
When you’re trying to improve your credit scores, a great place to start is by getting your credit reports from each of the major credit bureaus, Equifax, Experian and Transunion, and by getting a credit score for each. (Federal law requires free credit reports but not free credit scores. If you’re not already using a credit monitoring service, there are 138+ places where you can get your credit scores for free.)
Then review the top factors influencing your credit scores to help understand what may be bringing down your scores, and then look into ways to address them:
If your debt utilization ratio is hurting your scores, the easiest solution is to pay down credit card balances. Another option is to request a credit line increase. If you’ve made large purchases and plan to pay the balance off in full, you may want to consider making your payment earlier, before your balance will be reported to the credit bureaus. Some consumers have found it helpful to refinance credit card debt with personal loans, which don’t contribute to debt utilization in the same way.
Fortunately, late payments don’t typically appear on consumer credit reports unless you are more than 30 days late with a payment. Pay your credit card a few days late, for example, and you’ll probably be charged interest and a late fee, but it won’t likely be reported as late unless you don’t pay before the end of the billing cycle.
If there is accurate but negative information on your credit reports, such as missed payments, you may just have to wait it out. This type of information tends to have the greatest impact in the first 24 months. As it becomes older, it carries less weight, and building new credit references that you pay on time, all the time, can help.
A single credit inquiry shouldn’t cause your credit scores to drop dramatically. The impact is typically 3—7 points, and it usually evens out in a couple of months as long as there aren’t a lot of new hard inquiries posted.
Be smart about applying for new credit. It’s fine to apply for a new credit card if it’s a good deal. But limit new credit applications to credit cards and loans you really want to avoid unnecessary inquiries.
If you identify this factor as a problem, you can consider rounding out your credit score in a couple of ways:
- Get a credit card if you don’t already have an open, active credit card on your credit reports. If you can’t qualify for one, you may want to consider a secured card.
- Get a credit builder loan to add an installment loan to your credit reports if you don’t already have one. These accounts let you borrow a savings account, pay it off, and build credit as those payments are reported to the credit bureaus.
Here you may be able to “backdate” your credit history by getting added to a relative or close friend’s credit card as an authorized user. Their entire account history will typically appear on your credit reports. Keep in mind that if their credit utilization rate is high, or if they miss payments, your credit will suffer.