Why Did My Credit Score Drop? 6 Possible Reasons

Reviewing your credit score and discovering that it has dropped unexpectedly can be really frustrating. Credit scores are calculated using data from your credit reports. This includes your debt repayment ratio, how diverse your credit portfolio is, and what your credit limit is. 

Since this information keeps changing, it results in your credit score going up or down. However, a big drop in your credit score for seemingly no reason can be quite worrying. 

So if you’re wondering, “Why did my credit score drop”, you should take a look at your credit report and find all the possible reasons for it. 

In this guide, we have compiled various potential reasons why your credit score may have dropped. Read on to discover what they are and how you can fix them.

Why Did My Credit Score Drop So Fast? 6 Potential Reasons

Below, we have mentioned all the possible reasons why your credit score may have dropped. 

1. You Applied for a Loan or a Credit Card

If you have recently applied for a credit card or a loan, your lender will request your credit report to make their lending decision. This hard inquiry results in your credit score taking a slight hit. 

Every time someone checks your credit history through a hard inquiry, your credit score is affected. However, this is only a temporary drop in your credit score that restores in one to two years.

2. You Have Missed Your Payments

Your credit score can also drop if you have recently missed your payments. Since your payment history is the most important factor affecting your credit score, missed or late payments can have a negative impact on it.

For instance, if you are late by even a month, your lender will report your shortcoming to the credit bureau. This results in a lower credit score. Payments that are two to three months late can have an even worse impact on your score. 

Records of missed or late payments stay on your credit report for up to seven years. Therefore, it is incredibly important that you make your loan payments on time to maintain and even improve your credit score 

3. Your Credit Card Balance Is Too High

Your credit utilization also plays a key role in determining your credit score. If you have made a lot of purchases using your credit card, your credit score will go down. 

Usually, it is advised to use no more than 30% of your credit limit. The lower your credit utilization, the better. However, if you have ended up using more than 30% due to some extra expenses, make sure to pay it back as soon as possible.

But if your expenses have grown and you feel like you’ll be spending more from your credit limit, you can try to get the limit increased. However, make sure that your lender does not require a hard inquiry for that as it can negatively impact your credit score.

4. Your Credit Limit Decreased

Your credit limits are calculated based on various factors, including your debt-to-income ratio, monthly income, credit score, and credit profile. If you don’t use your credit card frequently, your lender will decrease your credit limit.

If your credit limit was lowered due to any reason, it will increase your credit utilization ratio. As a result, your credit score will drop. This is because even though your credit limit decreased, your balance would still remain the same, increasing your credit utilization ratio.

If this is the case, you can ask your lender to increase your credit limit. However, they may not increase it that easily. If that’s the case, you may need to get a new credit card.

5. Your Credit Report Has Incorrect Information

Sometimes, your credit report can have wrong information due to a misreported late payment, payment reported to an incorrect account, or a transposed number. This wrong information can result in a lower credit score.

Make sure to review your credit report to check for any mistakes. If you have found a mistake on your credit report, you can dispute it with the credit bureau via phone, mail, or by going to their websites.

6. You Have Recently Closed a Credit Card Account

You may also see your credit score drop if you have recently closed a credit card account. Closing a credit card account reduces your credit history and also increases your utilization ratio. 

This is because the credit limit is removed from your ratio. What’s more, it also shortens your credit history. Both of these factors can negatively impact your credit score. 

The longer your credit history is, the better your credit score will be. So it’s better to keep your credit card account open, in order to maintain your credit score.

Now that you know the answer to “why did my credit score drop”, we hope you can pinpoint the exact cause and fix it. You can also check out our comprehensive guide to improve your credit score.