Credit scores are generally calculated using information from your credit report about your finances. Credit-scoring companies like FICO® and VantageScore® consider activity across categories including but not limited to:
- Payment history
- Credit utilization
- Credit mix
- Credit history
- New credit applications
So when there’s any change in your score, it’s likely that there’s been a change in one of these or one of the many other factors that go into credit scores.
There are many possible reasons your credit score might drop. Here are 10 of the most common:
1. New credit applications
New credit applications—like for credit cards or auto loans—can have an impact on your credit scores. That’s because a new credit application generally creates a hard credit inquiry, which can cause your credit scores to drop by a few points.
Multiple credit applications in a short period of time could also indicate that your financial situation has changed negatively—and they might cause your credit scores to drop.
What you can do: Try to keep new credit applications to a minimum by only applying for the credit you need. Before you apply for a new credit card, you could first check with the lender to see if they can tell you whether you may be pre-qualified or pre-approved for one of their cards. For example, Capital One’s pre-approval tool uses what’s known as a soft inquiry to check your credit, which won’t hurt your score. Keep in mind that pre-qualification or pre-approval doesn’t guarantee you’ll be approved for a card.
2. High credit utilization
Credit utilization is a measure of how much of your available credit you’re using. It’s sometimes called a credit utilization ratio, but it’s often expressed as a percentage. Carrying higher balances or using a large amount of your credit limit can raise your credit utilization and lower your credit score.
What you can do: Experts recommend keeping your credit utilization at 30% or less to help you maintain a good credit score and show lenders you’re responsible with credit.
3. Payment history
Your payment history is an important part of your credit scores. Just one late or missed payment can have a negative impact on them.
The timing is an important factor to keep in mind. If you’re late making a required payment, your credit card issuer may charge a late fee and interest, depending on the issuer and card terms. After 30 days past the due date, the issuer may report the delinquency to the credit bureaus, which could have a negative impact on your credit scores.
What you can do: Consistently paying bills on time may help you improve your credit report’s payment history. If that feels easier said than done, you could consider setting up automatic payments or reminders.
4. Derogatory marks on your credit report
Negative information on your credit report is known as a derogatory mark. If a negative mark is listed on your credit reports, it can hurt your score.
Some common examples of derogatory remarks include:
- Missed or late payments: Late payments typically appear on credit reports when an account is 30 days or more past due. They can stay on your credit report for up to seven years.
- Foreclosures: Foreclosure can happen after you’ve missed mortgage payments and your lender takes ownership of your home. A foreclosure, as well as the missed payments that led to it, might appear on your credit reports.
- Bankruptcies: Bankruptcy filings can affect credit scores differently depending on the type. Typically, Chapter 13 bankruptcies—also known as reorganizational bankruptcies—can stay on credit reports for seven years. Chapter 7 bankruptcies—also known as liquidation bankruptcies—can stay on credit reports for 10 years.
- Charge-offs: When a credit card account goes 180 days (a full 6 months) past due, the credit card issuer must close and charge off the account. A charge-off will generally stay on your credit reports for up to 7 years.
With most derogatory marks, the negative impact on your credit generally diminishes over time.
What you can do: First, you could make sure the information in your credit report is accurate. You should dispute any errors with the credit bureau that provided your report and alert them and your card issuer of suspected fraud. But if the negative information is accurate, time and responsible credit use can help you improve your score. Credit counseling organizations can also work with you and offer personalized recommendations to improve your credit.
5. Closing a credit card
It may be tempting to close a credit card you don’t use, but keep in mind it may impact your credit. Once the account closes, the average age of your credit accounts could change. Because your credit scores are based partly on the length of your credit history, a shorter history can lower your credit scores.
Your credit utilization rate may increase because the closed card’s credit limit is no longer included in your available credit. And a higher credit utilization ratio can lower your credit scores.
What you can do: Continue using credit responsibly by making on-time payments on your other accounts and keeping your credit utilization low. You may also want to review your credit reports to make sure there are no errors.
6. An authorized user using your credit card
If you’ve added an authorized user to your credit card account, they’ll typically get a credit card linked to your account and can use it to make charges, but you’ll still pay the balance. Just having an authorized user on your account won’t hurt your credit. But if they don’t use the account responsibly, it could hurt both parties’ credit scores.
What you can do: Before adding an authorized user to your account, you might want to talk with them about responsible credit card use. Setting a spending limit with authorized users could help you avoid mistakes that could affect both your and the authorized user’s scores.
7. Paying off an installment loan
It doesn’t seem right that paying off debt could hurt your credit. But if you pay off an installment loan and it’s your only one, you could decrease the diversity of your credit mix—which can lower your credit scores.
What you can do: Once you pay off an installment loan, monitor your credit. Generally, the negative impact of closing a repaid loan account is temporary.
8. Co-signing a loan
When you co-sign a loan, you agree to make payments if the borrower is unable to. The loan and payment history can appear on your credit reports as well as the borrower’s. If there’s a hard inquiry when you co-sign the loan, it could affect your credit score. Any missed payments or misuse of the credit account can have the same effect.
What you can do: Before co-signing a loan, make sure you have room in your budget for the monthly payments in case the borrower is unable to cover them. It’s also a good idea to establish expectations with the borrower and ask for access to the account so you can track payments. But if you don’t have money to make the loan payments or you need to apply for credit in the near future, you might also choose not to co-sign the loan.
9. A mistake on your credit report
You might notice mistakes in your credit reports. That’s why the Consumer Financial Protection Bureau (CFPB) recommends reviewing your credit reports at least once a year to make sure they’re accurate. Any mistakes in your accounts, such as incorrect balances or payment information, may cause your credit scores to drop.
What you can do: You can check your credit reports for free at AnnualCreditReport.com or by calling 877-322-8228. If you see something you believe is an error in your credit reports, you might want to dispute the information.
10. Identity theft
Identity theft may impact your credit scores in a few different ways. For instance, a thief could open a new line of credit under your name, use the line of credit and fail to pay the bills. The credit utilization on the account could climb, and the payment history in your credit report could be affected. Because the information is listed under your name, your credit scores could drop.
What you can do: Check your credit reports regularly and look for signs of potential identity theft. If you suspect fraud, contact your bank’s or credit cards’ fraud departments to report identity theft. Capital One cardholders can get help right away. You can also file a complaint with the Federal Trade Commission (FTC) at IdentityTheft.gov and activate a fraud alert with the three national credit bureaus, Experian®, Equifax® and TransUnion®.
