6 Reasons Your Credit Score Could Drop
You might not be surprised to see your credit score drop if you stopped paying your bills or defaulted on a loan. But those are only two reasons your credit score could take a hit. Here are eight other reasons you could see a decrease in your consumer credit score.
1. You Applied for New Credit
When you apply for a credit card or loan, a creditor may check your credit report(s) with a hard inquiry. A single hard inquiry typically decreases your score by a few points.
2. You Closed an Account
Closing an account could decrease your credit score two ways. First off, it could lower the average age of your credit accounts—especially if it was one that had been open for many years. Secondly, it could lower your overall credit utilization ratio, particularly if the card you’re closing had a higher credit limit contributing toward lowering this ratio.
If you plan on applying for a mortgage or car loan or other form of credit any time soon, you may want to leave an older account you plan on closing open, even if you’re not using it. Closing it could lower your credit score and make you less attractive to potential lenders.
3. You’re a Victim of Fraud or Identity Theft
If you’ve been making your payments on time, haven’t applied for credit or opened any new accounts, and you experience a decrease in your credit score, it could indicate that you’ve been a victim of fraud or identity theft. If you suspect someone may be using your credit card(s) without your permission, it’s important to review your statements for any signs of fraud and, if you find unauthorized charges, report them to your card issuer immediately.
If you suspect your identity has been stolen and fraudulent accounts may have been opened in your name, you’re going to want to get copies of your credit reports immediately and review them for any accounts or activity you don’t recognize. By federal law, you’re entitled to a free copy of your credit report from all three consumer credit reporting agencies (Equifax®, Experian®, and TransUnion®) every year.
If it turns out you have, in fact, been the victim of identity theft, the FTC has created a guide to help victims halt and hopefully undo any damage they’ve experienced.
4. A Creditor Incorrectly Reported Account Activity
Many lenders report account activity to the three major consumer credit bureaus as frequently as every month. If you pay your bills on time, you probably expect that to be reflected in your credit reports. But everyone makes mistakes, including lenders and credit bureaus. If you’ve been making your payments on time but your credit score drops, the lender may have reported your account as “past due” even though it wasn’t.
That’s why it’s important to review your credit reports periodically. Under the Fair Credit Reporting Act, every American can receive one free credit report a year. And, in 2021, you can get your reports from Equifax®, Experian®, and TransUnion® online for free every week until April.
If you find an error on your credit report, it’s important to resolve it as quickly as possible. To fix a mistake, you need to dispute it by letting the credit reporting agencies, and perhaps the reporting creditor, know what information you believe is inaccurate and why. One way to do this is through a dispute letter. A dispute letter to a credit reporting agency will look a bit different than a letter to a lender. You may also dispute errors online directly with credit reporting agencies.
5. You Co-Signed a Loan
When you co-sign a loan, you’re taking on full responsibility for paying that loan back should the primary account holder stop making payments. If the person you co-signed the loan with isn’t making their payments as agreed and the loan is past due, you are on the hook for the balance of the loan, and the loan’s past-due status could damage your credit score.
6. Your Credit Limit Was Decreased
As long as it’s within the terms of your agreement and allowable by law, your credit card issuer can reduce your credit limit at their discretion. This could happen for a variety of reasons, including but not limited to, you begin missing payments, start charging more than usual, or because there are broader economic forces that put the card issuer at greater risk for losses because of customer defaults.
If your credit limit is reduced but you don’t pay down your outstanding balance and your spending habits don’t change, it could increase your credit utilization ratio because your available credit, the denominator of the ratio, has decreased. As your credit utilization ratio increases, your credit score may decrease.
Your credit health is a significant factor in lending decisions and the interest rates you qualify for. Your application is more likely to be approved, and you’re more likely to qualify for lower rates if you have a high score. If your credit score drops—no matter what the reason—it’s important to take steps to improve it.