In this article:
- You Have Late or Missing Payments
- You Recently Applied for a Mortgage, Loan or New Credit Card
- Your Credit Utilization Has Increased
- One of Your Credit Limits Decreased
- You Closed a Credit Card
- There Is Inaccurate Information on Your Credit Report
- You’ve Experienced a Major Event Such as Foreclosure or Bankruptcy
- What Is a Good or Bad Credit Score?
- Ways to Improve Your Credit Scores
- Handling a Dip in Credit Scores
There are lots of reasons why your credit score could have gone down, including a recent late or missed payment, an application for new credit or a change to your credit limit or usage.
The activities that affect your credit scores correspond to the way the credit scoring models calculate them. That means the most important information to understand about credit is the factors that go into your scores. Payment history is the biggest component in the most commonly used FICO® Score☉ models, followed by the amount of available credit you're using (in other words, your credit card balance) and the length of your credit history.
There are other elements, too, that could affect your credit scores, such as inaccurate information on your credit report. Below are the most common reasons for a credit score drop—and how to come back after your score takes a hit.
You Have Late or Missing Payments
Your payment history is the most important factor in your FICO® Score, the most widely used credit scoring model. It accounts for 35% of your score, and even one late or missed payment can have a negative impact. So, it's key to make sure you make all your payments on time.
If you are more than 30 days past due on a payment, credit issuers will report the delinquency to at least one of the three major credit bureaus, likely resulting in a drop in your score. Payments that become 60 or 90 days past due will have an even greater effect on your score..
If these delinquencies are not paid, the credit issuer may send your debt to a collection agency, and the collection account will be recorded on your credit report. Records of your late and missed payments remain in your credit file for seven years, while positive payment history on an open account can stay on file indefinitely (or 10 years if the account is closed in good standing). Be sure to make all your payments on time so the record of your strong credit behavior bolsters your score for years to come.
You Recently Applied for a Mortgage, Loan or New Credit Card
Whenever you apply for a new line of credit, lenders will request a copy of your credit report to determine your creditworthiness. They decide whether to lend to you by viewing characteristics like your payment history, credit usage and the types of accounts you currently hold.
Each time you authorize someone other than yourself, such as a lender, to check your credit history, a hard inquiry is recorded on your credit report and could slightly affect your score for up to two years.
As your credit profile matures, it's natural to accumulate hard inquiries. But if you apply for too much credit in a short period of time, it can negatively impact your scores and affect the likelihood that lenders will approve you for new credit.
Depending on how many inquiries you already have, a new hard inquiry could cause your score to drop, but potentially only for a short period of time. And any effect on your credit score should disappear in about one year.
Your Credit Utilization Has Increased
Maxing out your credit card could cause a quick drop in your credit score. Depending on your card's credit limit, making a large purchase or simply running up your balance can increase your credit utilization ratio, the second most important factor in calculating your FICO® Score. An increased credit utilization ratio can indicate to lenders that you are overextended and that, financially, you're not well-positioned to take on new debt.
Your credit utilization ratio is calculated by adding all your credit card balances at any given time and dividing that sum by your total revolving credit limit. For example, if you typically charge about $2,000 each month, and your total credit limit across all your cards is $10,000, your utilization ratio will be 20%.
You should aim to keep your credit utilization ratio below 30%, and for the best scores, below 10%. So, if your total credit limit is $10,000, keep your balances below $3,000 at all times to help keep your score in good shape.
One of Your Credit Limits Decreased
Similar to maxing out your credit cards, having your credit limit decreased can increase your credit utilization ratio and negatively affect your credit scores.
Imagine, as in the example above, your total credit limit was $10,000 and you carried a balance of $3,000. In this case, your utilization ratio would be 30%. If a credit card issuer lowered your limit to $6,000, but your balance remained the same, your utilization ratio would change to 50%. This could cause your credit score to drop.
Credit card issuers set initial credit limits based on factors including your income, current debt-to-income ratio, credit history and credit score. An issuer might lower your credit limit if, among other reasons, you haven't been using your card much or if you frequently miss payments or pay late.
You can request a credit limit increase from your current issuers or open a new credit card account if you're concerned that your credit limit is too low. But know that if your limit recently went down, an increase might be hard to come by, and it may be best to wait to request more credit until your score improves.
Regardless of whether your credit limits are shrinking or your balances are increasing, keeping an eye on your credit utilization ratio will help you better understand your fluctuating credit score.
You Closed a Credit Card
Think twice before closing a credit card you don't use. Closing a credit card account will not only increase your utilization ratio, it may also reduce the length of your credit history—both of which can impact your credit score.
When you cancel a credit card account, that credit limit is removed from your overall utilization ratio, which has the potential to lower your scores. Closing a credit card account you have had for some time can also shorten your average credit age, and that will factor into your credit score.
The length of your credit history counts for 15% of your FICO® Score, so a longer history is better for your scores. Keep in mind, however, that if your account is closed in good standing (meaning you made all your payments on time), it could remain on your credit report for up to 10 years.
Unless the credit card has a high annual fee that you cannot afford or it tempts you to spend more than you should, it doesn't hurt to keep the account open to maintain your credit limit and length of credit history.
There Is Inaccurate Information on Your Credit Report
Regularly checking your credit reports is one of the best ways to ensure no inaccurate information shows up in your file. Although it's rare, mistakes happen, and it is possible that incorrect information on your credit report—such as inaccurate personal data or payment history—is causing your scores to drop.
If something in your report is inaccurate, it could be a result of a lender accidentally reporting the wrong information. It could also be a sign that you have fallen victim to identity fraud. If you see something you believe is inaccurate, dispute the information with all three credit bureaus as soon as possible. But keep in mind, some pieces of data can't be disputed, like credit inquiries, accurate birth dates and credit scores.
You've Experienced a Major Event Such as Foreclosure or Bankruptcy
The late payments that often lead up to a bankruptcy or foreclosure harm your credit scores—and the events themselves can make matters worse.
Bankruptcy is a legal process initiated by borrowers looking to get relief from debt payments, and it's the most harmful single event to a consumer's credit. Foreclosure is when your mortgage lender takes possession of your house, often following four consecutive months of missed payments, and is second only to bankruptcy in terms of credit harm.
In addition to damaging your credit score, either event can disqualify you from certain types of borrowing in the future. A mortgage lender may be unlikely to take you on as a borrower if you have a foreclosure in your past, for instance. A legitimate foreclosure mark on your credit report will stay there for seven years.
The amount of time a bankruptcy stays on a credit report depends on the type of bankruptcy filed. Chapter 7 bankruptcy, for instance, appears on your report for 10 years from the date you filed, while Chapter 13 bankruptcy appears for seven years.
What Is a Good or Bad Credit Score?
Maintaining a good credit score has plenty of benefits, including potentially saving you a significant amount of money—and stress—over time. Good scores will help you qualify for more credit products at lower interest rates. Bad scores, on the other hand, may prevent you from qualifying for certain types of credit or may result in getting approved for credit products at higher interest rates, since your profile presents a bigger risk to the lender.
Credit scores are divided into different scoring ranges. Many scoring models, including the FICO® Score, use a range of 300 to 850. In that model, scores above 800 are considered exceptional, while anything above 700 is typically considered good. Scores below 669 are considered to be fair or poor. In 2020, the average FICO® Score in the U.S. was 710, according to Experian data.
Ways to Improve Your Credit Scores
If you're looking to improve your credit scores, these tips can help.
- Pay your bills on time. This is one of the most crucial steps to getting and keeping a good credit score. The best way to pay on time is to set up automatic payments so you won't miss a bill. But make sure you have enough money in the connected bank account to avoid an overdraft.
- Minimize overall debt. If possible, don't lean on credit to buy items you're not able to pay for in cash, or that you can't pay off by the end of the month. This keeps your payments manageable and your ongoing credit utilization ratio low. Your goal should be to bring your credit card balance to $0 at month's end.
- Monitor your credit regularly. There are many ways to check your credit score for free, including via Experian. Doing so can help you identify dips in your score quickly and course-correct if necessary. Free credit monitoring from Experian can help you keep tabs on both your FICO® Score and credit report, and keep you updated when there are any changes to your credit report.
- Avoid applying for unnecessary credit cards. Not only do some cards have pricey annual fees, but an abundance of cards might result in more spending than you can handle.
- Practice responsible spending habits. Setting up a budget—even a general one that categorizes your spending into a few overall buckets and doesn't require too much upkeep—can help you spend within your means over the long term.
Handling a Dip in Credit Scores
A drop in your credit score can be stressful, but it doesn't have to be permanent. There are ways to bring your score back up and to prevent another decrease in the future. Remember that credit scores are dynamic, and that you have the ability to improve yours with your own habits—an empowering truth that you can apply to other parts of your financial life too.
Learn More About Your Credit Score
- What Is a Good Credit Score?
For a score between 300-850, a credit score of 700 or above is generally considered good. A score of 800 or above is considered to be excellent. Find out...
- How to Improve Your Credit Score
There are steps you can take to increase your credit score, and the sooner you address certain factors, the faster your credit score will go up.
- What Affects Your Credit Scores?
Knowing what factors and types of accounts affect your credit score is the first step to improving your credit—which could save you thousands over time.
- How Long Does It Take for Information to Come Off Your Credit Reports?
If you have negative marks on your credit report, time is on your side. Late payments, delinquencies and even defaults eventually fall off naturally.
- How to Dispute Credit Report Information
Here’s how to request corrections to information in your credit reports—a process known as a dispute.