Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.
In this article:
- 1. Understand the Reasons Why Your Credit Score Can Drop
- 2. Check Your Credit Report
- 3. Dispute Credit Report Information You Believe to Be Incorrect
- 4. Take Actions to Improve Your Credit Score
Your credit score can change for many reasons, and it's important to understand what's going on if you've noticed a drop in your score. Follow these steps to understand why your credit score might have changed, what you can do about it and how to prevent future credit score drops.
1. Understand the Reasons Why Your Credit Score Can Drop
From missing a payment to applying for a new credit card or loan, there are many reasons your credit score can go down. But not everything that can cause your credit score to drop will have the same impact. Certain factors play a bigger role in your score, which means some changes can take a bigger toll on your score than others.
Here are some common situations that may cause your credit score to drop.
Late or Missed Payments
If you're more than 30 days past due on a payment, credit issuers typically will report the late payment to one or more of the three major credit bureaus (Experian, TransUnion and Equifax). Accounting for 35% of your FICO® Score☉ , payment history is the most important factor in determining your credit score. This means just a single missed payment can have a large and lasting impact on your credit. If additional late payments occur, your score can take an even bigger hit. Once your payments become 90 days past due, your creditor could send the account to a collection agency. Records of both late payments and collections can remain in your credit file for seven years.
Increased Credit Utilization
Your credit utilization ratio is the second most important factor in calculating your FICO® Score. Ideally, you should aim to keep your credit utilization ratio below 30%. Those with the best scores tend to keep their credit utilization rate under 10%.
Credit utilization is calculated by adding all your credit card balances and dividing the sum by your total revolving credit. For example, if the total limit on all your cards is $10,000, and you typically charge about $3,000 a month, your credit utilization ratio will be about 30%. Scoring models typically consider your total credit utilization as well as that for each individual card.
When you make a large purchase or run up your balances, this directly affects your credit utilization. Credit utilization can also be affected by reduced credit limits as a result of card issuer changes or credit card account closure.
New Applications for a Mortgage, Loan or Credit Card
Applying for a new line of credit, such as a mortgage, installment loan or new credit card will likely cause the lender to check your credit. Whenever a lender checks your credit in relation to a credit application, a hard inquiry shows up on your credit report. While this can temporarily lower your score by a few points, hard inquiries are a normal side effect of obtaining credit and building your credit history. However, many hard inquiries during a short period can have a compounding effect on your credit score. For example, applying for several credit cards at once could have a noticeable impact on your creditworthiness. The score impact of a hard inquiry will typically last a few months to a year.
Information Reported in Error
Although rare, your creditors may inaccurately report payment history or other account information to the credit bureaus. Unfamiliar information in your credit report can also be a sign that you may have been a victim of identity fraud. If the information is negative, it could cause your scores to drop. If you believe you've found inaccurate information in your credit report, you have the right to dispute the information, which could result in its removal. (More on this below.)
Bankruptcy or Foreclosure
Bankruptcy and foreclosure can result in a major negative hit to your credit score. How long a bankruptcy stays on your credit report varies depending on the type of bankruptcy. For example, Chapter 13 bankruptcy stays on your report for seven years from the date of filing, while Chapter 7 will remain for 10 years. While foreclosures aren't as damaging to your credit as bankruptcies, they still stay on your credit for seven years and may disqualify you from being approved for another mortgage in the near future.
2. Check Your Credit Report
Keeping close tabs on your credit report can help you stay on top of any changes to your score and ensure that the information on your report is accurate and up and to date. At the very minimum, it's a good idea to obtain a free report from each credit bureau, which you can do through AnnualCreditReport.com.
You can also check your credit report for free with Experian, which provides monthly updates so you can better track changes to your report. You can use the "see what's changed" feature to easily spot new information on your report. It points out updates to your overall debt level; the opening and closing of accounts; changes to your total credit card borrowing limit; new inquiries; new collection accounts and more. It also offers tips to help you understand how any changes may impact your score.
3. Dispute Credit Report Information You Believe to Be Incorrect
Checking your credit regularly can help you spot inaccurate information that may be the result of fraud or due to your creditor inaccurately reporting account information. If you find something you believe to be incorrect, it's important to take action immediately—especially if you suspect fraud. You have the right to dispute information in your credit report by contacting the credit bureau on whose report the information appears.
It's also a good idea to check the other credit bureaus to make sure the same information doesn't also appear on those reports. Filing a dispute is free, and the removal of negative information that was reported in error could give your credit score a lift.
4. Take Actions to Improve Your Credit Score
Depending on how much your score dropped, it could recover relatively quickly or possibly take longer to rebuild your credit.
Here are some actions you can take to improve your credit score:
- Pay your bills on time. Improving your payment history is a key part of getting your score in shape, and a long history of on-time payments can help you achieve excellent scores. Aim to always pay every bill on time. Setting up automatic bill payment can help ensure you don't miss any payment deadlines. Missing a payment can result in late fees and credit score harm.
- Keep a low credit utilization rate. Running up credit card balances, or worse, maxing them out, can cause your score to drop. Paying more the minimum can also help you pay down existing balances faster.
- Don't apply for too many new credit accounts. Applying for new credit can help reduce your utilization rate, but if you apply for too many new credit cards or different types of loans, lenders may question your ability to repay the debts. And you could get hit with multiple hard inquiries. However, if you're shopping around for the best home or auto loans, credit scoring models may combine these inquiries as long as you apply within a short window of around two weeks.
- Sign up for Experian Boost®ø. If you want a jump start rebuilding your credit, you can use Experian Boost to try and get credit for bills not typically reported to the credit bureaus such as utilities, cellphone and popular streaming services.
The Bottom Line
Credit scores will fluctuate over time, even with the most responsible credit use. And while some actions, such as not paying your bills on time, can lower your score more than a hard credit inquiry, for example, any dip in your credit score can be stressful. If your score goes down, taking certain steps, such as checking your credit report and score regularly, keeping an eye on your credit utilization ratio and setting up auto bill pay can help you get back on track and prevent future score drops.
