An unexpected credit score drop can be scary. If you ever experience a score decrease, this guide can help you discover the cause – and most importantly, teach you how to fix it.
Why do credit scores fluctuate?
Credit scores fluctuate for many reasons. Sometimes, the cause of a score variation is simply due to the differences in bureau reporting. Since each bureau uses its own formula to calculate your credit, your score can fluctuate from one bureau to the next. Another fact to consider is that lenders have a choice on which bureau(s) they choose to report your information to. Because of this, one bureau may contain more data than another – which could result in a higher or lower score.
Outside of bureau differences, your score can either go up or down based on your financial activity. Depending on your action, as well as what’s listed on your report, these changes can be large or small. And while an increase in your credit score is always welcome, a credit score drop isn’t quite as pleasant. Here are 6 possible causes of unexpected credit score drop with solutions to ideally turn things around.
Cause #1: You’re 30-day or more late on a payment
One of the most common causes of sudden credit score drop is being late or missing a payment by 30-days or more. Anytime this happens, you run the risk of having the payment delinquency reported to one, two, or all three credit bureaus.
Make it a goal to always pay your bills on time. If the damage is already done, here are a few options that may be able to help you reverse the damage.
- Goodwill letter. For smaller debts, write a letter to your lender to explain your unique situation and why it may have caused you to miss a payment. If this is a one-time mistake and if you resolve the late payment immediately, the lender could be willing to remove the damaging information from your report.
- Pay-for-delete agreement. For larger debts, you can try to negotiate a payoff agreement to settle the debt you owe while also potentially getting the negative mark removed from your report. As with most financial negotiations, it’s wise to get your agreement in writing before making your resolving payment.
Regardless of the tactic you try, report removal will ultimately be up to the lender or collections agency and is not a guarantee.
Cause #2: Your credit utilization ratio went up
Likely the most overlooked cause of an unexpected credit score drop is when your credit utilization ratio goes up. This happens when you charge over 30% of your credit limit without paying it off before the end of your billing cycle.
Avoid maxing out credit cards and strive to keep your revolving balance at or under 30% of your credit limit each month. For example, if your card has a $10,000 limit, your end-of-month balance should never exceed $3,000. For best credit results, pay your full statement balance (not the minimum about due) each month. Additionally, making an extra mid-cycle payment could also help you maintain a healthy credit utilization.
Cause #3: You agreed to a hard credit check
Unlike checking your own credit, which is considered a soft credit check, if you allow a lender to conduct a hard credit check to apply for items like a mortgage or auto loan, it could result in a credit score drop. Generally speaking, applying for a new line of credit is different than receiving a pre-qualifying offer. But if you’re ever unsure about which type of credit inquiry a lender plans to use, just ask before you give the okay.
Hard credit inquires are sometimes just a part of life. If you ever want a credit card, auto loan, or home, a hard credit inquiry is usually part of a deal. And if performed responsibly, these occasional checks shouldn’t do too much damage. The real risk in this category lies with the amount and time frame of inquiries you agree to. For example, if you apply for several credit cards over a single week, it can put up a red flag to lenders and may hurt your score. To fix, try to limit the number of hard credit checks you agree to and space out new enrollment when possible.
Cause #4: You closed an old credit card
That’s right, closing an old credit card could cause your credit score to drop. Here’s why. Depending on the scoring model, the length of time you’ve been using credit makes up about 15% to 21% of your overall score. If you choose to close an older credit card, you may also remove the number of years associated with the card’s use. By the same token, closing any line credit will also take away the card’s available credit, which could also cause a credit score drop.
Weigh the pros and cons before you close a line of credit. Consider the fees, interest rate, and whether or not you can make a use for the card before deciding to close it down. If it makes sense for you financially, keeping it open just for gas or your cell phone bill, could be beneficial to your credit.
Cause #5: there is an error on your credit report
If you’ve seemingly done everything right and still experience an unexpected credit score drop, it could be due to a reporting error. Credit report errors can happen at any time. Depending on the severity of the item, a reporting error could drop your score by 1 to 100 points or more.
Regularly review your 3-bureau credit reports. If you ever detect an error, act fast to dispute the item(s) quickly. Credit disputes can either be filed by hand or online using software solutions like ScoreShuttle. To learn more about the dispute process, including how to file your own, click here.
Cause #6: You’re the victim of a cybercrime
Cybercrime is at an all-time high and could leave your report and livelihood venerable to scammers. Illegal actually such as fraud, identity theft, and gift card scams could steal your money and drastically hurt your credit.
Use strong passwords and keep your guard up if someone calls or emails you for personal information. In addition to checking your credit report, it’s also wise to monitor your identity and possible dark web activity. If you are the victim of cybercrime you should report it immediately. If the scam impacts your credit, your best chance at report removal is to file a credit dispute online.
Disclaimer: The content provided is for informational purposes only and not to give advice or guidance on credit improvement.