9 Reasons Your Credit Score May Drop

Krystal EtienneUpdated July 9, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Reasons your credit score may drop include using large amounts of available credit, making late payments, and even closing credit card accounts. Understanding the many actions that can cause a credit score to drop is key to keeping a score in good standing. If your digits do drop, all is not lost. You can take steps to improve your credit score.

What Is a Credit Score?

A credit score is a measure of how well someone manages debt. As you go through life paying for monthly services and paying down debt, those businesses report the details and status of your accounts to the three major credit bureaus: Experian, TransUnion, and Equifax.The bureaus then evaluate your payment history, mix of credit types, length of credit history, and amount of your available credit you’re using to determine your credit score, typically a number ranging from 300 to 850. If you have a business, that, too, has a credit score, though the range is much different.

Why Is a Credit Score Important?

A person’s creditworthiness predicts the risk a creditor faces in loaning them money. The higher the credit score, the lower the risk to lenders.A credit score comes into play when applying for a credit card, mortgage, personal loan, apartment rental, auto loan, some jobs, and even utility startup. With a bad score or without an adequate credit history, securing some of these can be difficult or impossible. The most widely used credit score brand, FICO®, considers a credit score of 670 to 739 “good.” VantageScore®, a joint venture among the three major credit reporting agencies, considers a score of 661 to 780 “good.”The average credit score among Americans falls solidly in the “good” camp, which is good news for them, because generally speaking, a good — or better — credit score translates into more attractive loan rates and terms, and in some states a better rate on auto and homeowners insurance.

Why Did My Credit Score Go Down?

Here are nine of the most common actions that can cause a credit score to drop:

1. Late Payments

Making payments on time is the biggest factor that affects your credit score.If a payment goes beyond 30 days late, creditors generally use the “late” code, which is considered a delinquent payment. One late payment reported by a creditor can damage a credit score, and enough missed payments could even cause your service provider to close your account and send it to a collections agency. People with excellent credit histories tend to experience more significant credit score drops from late payments than individuals with poor credit. If you’ve co-signed an account for another person and that person has late or missed payments, that will affect your credit score, as well. Your name on the account makes you liable whether or not you’re using the service.

2. High Credit Usage

Using large amounts of your credit can trigger a credit score drop. Your credit utilization ratio is the percentage of revolving credit that you are actively using compared with the total amount of credit available to you. For instance, using $250 worth of credit on a credit card with a $1,000 limit would result in a 25% credit utilization ratio. High credit utilization rates can indicate money management issues and can raise red flags with lenders. Borrowers who keep their credit utilization rates below 30% are viewed as more financially stable and may see their credit scores increase. Your ratio can affect up to 30% of your overall credit score, so ensuring it stays relatively low is important for maintaining, or raising, your credit score.

3. Multiple Credit Applications

Applying for too much credit in a short period of time can hurt a credit score. When applying for loans or credit cards, lenders conduct “hard inquiries” into your credit history to assess whether or not to approve your application. Multiple hard inquiries can indicate that an individual is experiencing financial troubles. When these red flags go up, it may cause credit scores to come down, so being cautious about how much credit you apply for at one time can help keep your credit in good standing. Here’s something good to know, though: Multiple hard pulls for a home or auto loan within a certain period of time, typically 14 to 45 days, are generally counted as one inquiry.

4. Decreased Credit Card Limit

If you’ve recently reviewed your credit card statement and noticed a decrease in your available credit, that dip may also be present in your credit score. Because the total amount of your available credit directly affects your credit utilization ratio, a decrease in any of your credit limits will cause your credit utilization ratio to increase, which in turn may negatively affect your credit score. Lenders reserve the right to decrease a customer’s credit limit, and may do so based on a customer’s financial history and performance as well as industry trends.

5. Closure of a Credit Card Account

It can be tempting to cancel a credit card you no longer use in order to manage your spending or streamline your finances, but that can do more harm than good. Closing a credit card account has the same effect as decreasing your credit limit: It abruptly lowers your total available credit, which may increase your credit utilization ratio and drop your credit score. Instead, consider disposing of your physical cards but keeping your account open.

6. Loan Payoff

Paying off a personal or student loan is generally considered an accomplishment, but this achievement may not reflect positively on a credit report. In fact, for a number of reasons, paying off loans can often cause temporary drops in credit scores.Credit reporting bureaus tend to favor individuals who maintain a variety of accounts. If the loan you paid off was your only loan, that could make your credit report less favorable and decrease your score. Also, if, for example, the auto loan had a low balance compared with your other debts, that could cause a score drop (because now you have only the higher balances). Despite these factors, paying off a loan is always a relatively smart move.

7. Foreclosure or Bankruptcy

These events are known for having the worst impact on a credit score. A foreclosure — when a mortgage lender reclaims a property for lack of payment — remains on a credit report for seven years. (Some mortgage lenders may consider applicants who’ve had foreclosures three years after the fact, but the aspiring borrowers may be offered higher interest rates and charged extra fees.)A bankruptcy filing occurs when an individual seeks to eliminate or reduce debt by court order. Depending on the type of filing, a bankruptcy will remain on a credit report for seven to 10 years. During the time that these negative marks exist on your credit report, not only will your credit score take a major hit, but qualifying for additional credit, applying for an apartment, and even finding favorable insurance rates may be very difficult.

8. Inaccurate Credit Reports

Mistakes happen, and sometimes they occur on a credit report. Because your credit score calculation is based on the information in your credit reports, if something is amiss, your credit score will reflect that inaccuracy.Federal law allows you to receive a free annual copy of your credit report from each of the major credit reporting agencies. Regularly checking your credit reports can help maintain their standing. Credit reports do not show credit scores, though. To obtain your credit scores, a credit score monitoring service can help. So how much is credit monitoring? It often costs nothing. When choosing a source for free scores so you can monitor your credit, you may want to look for one that includes other benefits as well.

9. Identity Theft

If in reviewing your credit reports you find accounts that you did not create, you may be a victim of identity theft. From personal loans to cell phone plans, if there are any accounts on your credit reports that you don’t recognize, or anything subject to a collections agency that you haven’t purchased, directly reach out to the credit bureaus with the misinformation and request information on how it might be removed.

The Takeaway

Why did your credit score drop? A credit score can dip for any number of reasons, even well-intentioned ones like paying off a loan or closing a credit card account. To maintain your credit score, it’s best to avoid certain actions, review your credit reports, and monitor your credit score.Shopping for a new credit card? Compare credit cards with ease on Lantern.

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About the Author

Krystal Etienne

Krystal Etienne is a seasoned writer, editor, and storyteller with a passion for personal finance. Armed with a master’s degree in publishing from New York University, Krystal develops award-winning content during the day, mentors young adults through life skill development at night, and festival-hops on the weekends. She believes that with enough knowledge and the right tools in place, anyone can be capable of success.

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