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Why Did My Score Drop if I’ve Never Been Late on a Payment?

Jennifer White
By
Jennifer White
By
Dear Experian,

You dropped my credit score because I maxed out my credit cards to pay my employees. Why? I've never been late.

- BTK

Dear BTK,

Credit reports and credit scores are two different things. The credit bureaus, including Experian, compile your credit history. Credit scores, and the algorithms used to calculate them, are proprietary to the companies that develop them. Two of the most recognized credit scoring companies are FICO® and VantageScore®.

While you may see your credit scores through Experian, the credit bureaus don't calculate—or lower—scores. If the information in your credit report changed (such as when you maxed out your credit cards), a lower score may have resulted when your score was calculated by the credit scoring company. Lenders decide which scoring systems they will use to analyze the information in your credit report. A common myth is that credit scores are part of your credit report. But they're not: They are a separate tool used to evaluate the information in your credit report.

High Credit Card Balances Can Negatively Impact Credit Scores

One of the most important factors in credit scores is your credit utilization ratio, also called your balance-to-limit ratio. The higher your credit card balances, the higher your utilization rate will be. Even if you've never made a late payment, a high utilization rate is a big indicator of risk to your lenders and can potentially hurt your credit scores.

Credit scores always reflect the information in your credit history at the moment in time your credit report is requested and the score is calculated. If you've recently maxed out your credit cards, your current utilization rate may be at or close to 100%. The higher your utilization rate, the more impact it will have on your credit scores.

Keep Your Personal and Business Credit Separate

You indicated that you used your personal credit cards to pay your employees, so it sounds like you may be a small business owner. While the reason for maxing out your cards was noble, using personal credit for a business emergency means your personal credit history may be impacted negatively.

Ideally, you should try to keep business and personal credit separate. Going forward, it may be a good idea to have a separate business credit account that you can use in the event of a business-related emergency. Having a line of credit in the business's name only can help you protect your personal credit from being affected in a situation that is beyond your control.

How to Get Help During COVID-19

In the meantime, reach out to your lenders to see if they offer any repayment options to help you under these circumstances, such as a forbearance or another payment accommodation. If you are a business owner, we encourage you to review the provisions for small businesses in the CARES Act. We've also provided a list of businesses that are offering assistance and support during this time.

You may also want to consider getting a copy of your business credit report. Looking over your business credit report can help you to know where you stand so you can begin to make a financial plan for your business during this crisis. Businesses can also call us or submit a form online to inquire about ways to help navigate this new normal.

Thanks for asking.

Jennifer White, Consumer Education Specialist

This question came from a recent Periscope session we hosted.

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