If you are the type to keep track of your credit score, you might one day wake up to see your credit score drop unexpectedly! Then you ask yourself why my credit score suddenly dropped? I’ve been there, and I know that sinking tummy feeling you get when this happens.
Your credit score might have dropped suddenly for a load of different reasons. Credit bureaus don’t tell us exactly how the credit score model works. There are a few specific reasons that can cause a sudden drop. If you’re wondering why did my credit score drop, here are the top reasons why.
1. You applied for new credit
If you recently applied for a new loan or credit card, this has an almost instant effect on your credit score. It will probably drop a few points. Whenever you apply for a loan, the lender performs a credit inquiry, and that dings your credit score.
Inquiries typically stay on your account for around 2 years, but the effect of that inquiry wears off over time. So if you recently applied for credit (even if you didn’t open a new account), that inquiry does affect your score a bit.
2. You missed a payment
If you are juggling multiple accounts or just a mistake on your part, sometimes you might miss a payment on one of your accounts. It might have been your first bill, or a check bounced, or you just forgot. It happens.
Missing a payment has the largest effect on your credit score. If you missed a payment, your score probably dropped significantly. But as soon as you find out, pay it immediately! After that, call your creditor and ask for forgiveness. This has worked for people in the past, so no harm in trying! You lose nothing, and potentially get to recover your credit score quickly.
3. You made a large purchase
Another very important category of your credit score is your utilization rate. If you recently made a large purchase, your credit utilization went up because you used much more of your overall credit. You can potentially see a credit drop even if the balance will be paid off at the end of the month.
The good news is once that balance is lowered back to what it was before, your credit will recover and go back to normal. You can either make sure its paid off, or request an increase on your credit so that it lowers your credit score.
4. Your credit limit was lowered
Yes, this actually does happen to people more than you think. Typically, banks may look at a credit card and see that it’s not being used and may potentially lower the overall credit limit. Other reasons may also cause this, but when it happens, your utilization rate will increase since your balance in contrast to your overall credit is higher. If this happens, paying down your credit balances will help.
5. You closed a credit card
The thing is, with how the credit formula works, the older your average of all accounts the better your score. You might want to close older unused cards, but this also drops your credit score a bit. Also, closing an account lowers your overall credit.
This is why it’s always recommended that you keep your cards open so they help with the maturity of your overall credit, and keeps your overall credit higher.
6. You paid off a loan
Wait. Why would paying off a loan drop my credit? Well, the thing is once you pay off an account, you have one less account contributing to your score. You’ll have a lower average age, lower overall credit, and less variety.
You would think that paying off a loan is beneficial as it shows financial responsibility, but alas, that’s not how the credit formula and system works. Instead, try keeping your credit usage low. Always pay on time and keep your accounts open as long as you can.
7. An account was sent to collections
If you, unfortunately, fall far behind on your accounts, the lender or bank will place the defaulted amount into collections. When they do this, the collections are added to your credit score and will have a huge impact on your credit score. It’s very important to make sure that you pay all your credit cards and loans on time. Whenever you are about to fall very behind on payments, reach out to your lender asap! See if you can lower payments and avoid collections at all costs.
8. You are a victim of identity theft
If your credit score dropped without you doing anything then that’s a big red flag. It might be a sign of identity theft. Whenever you notice a drop in your score, make sure to check your credit report for anything out of the ordinary. Look out for things like new accounts you don’t know of, address changes, etc.
The first thing you should do is go to identitytheft.gov and file a report. The sooner you act when you notice weird things on your credit score, the better. That’s why it’s extremely important to always keep track of your credit score.
Once you’ve done that, sign up for identity theft protection, as you might now be a target of future attacks! You don’t want scammers opening credit cards and mortgages under your name. Once more damage is done, it’s so much harder to recover from it! I highly recommend looking into Identity Guard and signing up.
I personally use Credit Karma to get a general idea of what my credit score is too. I recommend you keep an eye out on your credit score at all times.
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Appreciate it for helping out, superb info .
Absolutely! Glad it was helpful!