Overview

If you have recently seen a large drop in your credit score, you may be wondering what happened. Having your credit score drop is a common experience, and just because your credit score dropped does not mean something bad has happened.

Credit scores will rise and drop for a wide variety of reasons. Let’s take a look at all of the possible reasons your credit score has dropped


Your Utilization Ratio Increased

There are 5 total factors that account for your credit score. The second largest factor is credit utilization, which accounts for 30% of your total credit score.

Although this can vary between companies and various credit reporting models (Like VantageScore and FICO), credit utilization tends to be a high-impact factor for most credit scoring models.

But what is credit utilization? Simply put, credit utilization is how much of your available line of credit you use at any given time. Often times, it is expressed as a percentage ratio.

Most credit experts agree that utilizing more than 30% of your total available line of credit could raise red flags to many lenders, and thus lead to a drop in your credit score.

Why is this? Simply put, when you utilize more of your credit, it can signal that you are in a financial bind and need to use your credit to make everyday purchases. It can also show that you may be in a situation where you have to take on more debt to repay older debts.

Even if you have shown the ability to responsibly repay your credit card debt in the past, having a high credit utilization ratio can still lower your credit score.

To find out your credit utilization ratio, simply find out how much your total line of credit is. For this example, let us assume you have a credit card with a $10,000 monthly purchase credit limit.

In order not to exceed the standard threshold of 30% or more credit utilization, take $10,000 and multiply it by .30 ( this is how 30% is expressed in the form of a decimal).

Once you take $10,000 x .30, you should end up with $3,000 as your ideal credit utilization amount. If you exceed the $3,000 threshold, you might see a drop in your credit score. If your creditor senses a massive amount of credit being utilized, they may even opt to lower your credit limit.

If you need to utilize more of your available credit, it is recommended that you ask for a credit limit increase first. Asking for a credit limit increase allows you to have a larger credit limit, increasing the amount of credit you can spend.

Be sure that you check your credit report and score first to see if your credit is healthy enough to qualify for a credit limit increase.

As an example, let’s say that the credit card company agreed to increase our credit card limit from $10,000 per month to $15,000 per month. If we take the $15.000 and multiply it by .30, we get an optimal credit utilization amount of $4,500 on $15,000 in available credit.

In order not to exceed the 30% threshold, you can now spend up to $4,500 without a large impact on your credit.


You Missed a Credit Account Payment

Missing a payment or making a late payment on a credit card bill, student loan,A past due stamp on top of a bill that went unpaid or mortgage can harm your credit significantly. Payment history is the largest factor affecting your credit score, accounting for 35% of your total credit score.

Late payments are a big deal when it comes to your credit score. The purpose of your credit score is to tell potential lenders the likelihood of you being able to repay the debt back.

Missing a payment or making a late payment could make it seem as if though you are unable to repay or are in a hard financial situation.

A single late payment can have a huge impact on your credit score. Usually, the lender or creditor will report a payment as late or missed after 30 days.

This data is sent to the credit bureaus who then log the late or missed payment onto your credit report.

After the negative entry is on your credit report, your score will adjust to show the difference. If you are one to forget to make payments, its best to set up automatic payments on all of your credit accounts.

If you have made a late payment on your credit account and saw a drop in your credit score, do not be hard on yourself. If you continue to make the remainder of your payments on time and in full, you should see the late payment have a reduced effect on your credit score.

Late payments can stay on your credit report for as long as 7 years. If you think that you may miss a payment or are unable to pay it, call the creditor or lender right away.

Believe it or not, most creditors and lenders understand things can come up. If you are open about your situation, they may be able to work out a plan for you.


You Received a Negative Entry on Your Credit Report

If you have seen a large drop of 100 points or more on your credit score, chances are a derogatory mark was placed on your credit report. Some examples of a derogatory mark can include:

  • Having a repossession
  • Filing for bankruptcy
  • Civil judgments
  • Tax liens

If you see a derogatory mark while examining your credit report, it is essential that you take care of the situation right away. Take the time to call your creditor or lender to discuss the situation.

Major delinquencies and derogatory marks will make lenders think twice before providing you with a line of credit, so taking care of a negative entry is of the utmost importance.

In 2017, the 3 major credit bureaus unanimously decided to remove nearly half of all civil judgments and tax liens from consumer credit reports.

This is because many state attorneys are now requiring “enhanced” public data for credit reporting, and many tax liens and civil judgments do not meet the new public data requirements.


You Applied for a Loan or Line of Credit

If you apply for a home mortgage or a new credit card, you may see a decreaseEntries showing a new line of credit on a persons credit report in your credit score. Before a bank or lender loans out money, they will need to check your credit score and report.

When it comes to hard money loans, lenders will perform a hard credit check, often referred to as a hard credit inquiry or hard credit pull.

In order for a lender to conduct a hard credit check, they will need your authorization. Conducting a hard credit check tends to reduce credit scores by only a few points.

Normally, one single hard inquiry should not be of great concern. However, we strongly advise against applying for a fury of credit cards and loans within a certain period of time.

The credit bureaus understand that consumers will shop around for the most affordable loans. In order to adapt to this, the bureaus allow you to perform multiple hard credit inquiries within a 14-day period that will count as just 1 inquiry.

Although the decrease from applying for a new line of credit is negligible in most cases, its best practice to avoid constantly applying for new lines of credit or loans.

If you do apply for multiple loans and credit cards in a short period of time, it could signal that you are in a cash bind.

The credit bureaus keep and record all hard inquiries since lenders will want to know if this person has applied for multiple loans in the past with no success.  Only apply for additional lines of credit if it is deemed to be absolutely necessary.


You Paid Off a Loan

Credit mix is another factor that impacts credit scores. Although credit mix only contributes to 10% of your total credit score, paying off a loan or removing a line of credit lowers the different types of credit you have available to you.

Having credit available to you from various sources can signal to lenders that you have an ability to pay off all your lines of credit.

Some of the biggest examples of lines of credit that affect credit mix are student loans and auto loans. When you pay off a large loan, your credit losses diversity.

Vice versa, if you apply and get approved for a fury of loans and credit accounts, it can signal that you are in financial hardship.

Before you make the final payment on a loan or other credit account, be sure to check your credit reports to see all of your closed and open accounts. Most accounts, whether open or closed, will be reflected in your credit report for seven years.

If you want to minimize the impact of paying off a loan on your credit score, your best bet is to keep old accounts open. A student loan or auto loan adds a lot of weight to your credit history, since these loans often take 5 years or more to pay off.

Once the loan has been paid off in full, you will stop receiving any and all credit boosts due to on-time payments.


You Closed a Credit Account

With so many consumers tempted to splurge on their credit cards, many have A credit card statement showing a large balance affecting a users credit scoreresorted to closing their credit accounts altogether. While it may seem like a good idea to cancel a credit card, it can cause your credit scores to drop.

Closing an old credit card or line of credit directly ties to credit history, which is the third largest factor affecting your score at 15%. Your credit history measures the average age of all your open credit accounts.

The older the credit card account or line of credit was, the more your score benefited.

Why? This is because lenders and creditors want to see your historical ability to repay debts and keep accounts open. Having an older credit card also shows lenders that your spending habits are more predictable, and that you are more likely to repay your debts.

Closing an old credit card also ties directly to your credit utilization ratio. Once you cancel an old credit card, your available line of credit decreases, meaning that you now must spend less to meet that 30% threshold we had discussed earlier.

If you do want to cancel a credit card, be sure to cancel one that is newer, not older. Canceling an older credit card will lower the average age of your accounts, but canceling a new credit card can counteract that effect.

Closing a card does have an impact on another essential credit score factor, your credit utilization ratio. Once you cancel the credit card, that line of credit is no longer counted towards your total credit limit.

Call your card provider and ask for a credit limit increase on your other cards. This way, your credit utilization ratio is not impacted too heavily.


Final Note

Due to the many factors that affect a person’s credit score, there could be multiple reasons why your credit score dropped. Remember, the five main factors that affect your credit score are:

  • Payment History: 35%
  • Credit Utilization: 30%
  • Credit History: 15%
  • Credit Mix: 10%
  • New Credit: 10%

A negative effect on one of these factors can be enough to drop your credit score. Keeping track of your credit score is a great way to ensure that you do not fall victim to a credit reporting error or identity theft.

You can use tools like Credit Sesame’s credit center to track and monitor your progress on your credit score.

If you have less than perfect credit and don’t know where to go, CrediReady can help. Our trusted network of credit repair experts can boost your score and help you qualify for the credit you need. Take a moment to fill out our free no-obligation credit repair inquiry form and start fixing your credit today!