Your credit score is a critical component of your financial health, so you want to make sure it’s as high as it can be. If it’s in bad shape, you’ll find it difficult to get approved for a mortgage, auto loan, and other loans on credit.
But if you think all is well with your finances, it can be rather disheartening to find out that your credit score dropped from one month to the next. The question is, how and why would this happen?
There are plenty of reasons, including the following.
1. Your Payment is Over 30 Days Late
One of the biggest reasons why a credit score plummets is because of missed a payment that is at least 30 days overdue. If you were a couple of days late on a payment, you won’t notice a difference in your credit score. But once it’s past due by at least 30 days, it will be reported to the credit bureaus. When the credit bureaus get wind of your overdue payment, your credit score will suffer.
Your payment history accounts for 35% of your credit score, so you can be sure that a missed payment will have a major impact. Even just one missed payment can make a big difference. Not only will your credit be dinged, you’ll also be stuck with a late payment fee from the creditor you owe.
2. You Maxed Out Your Credit Card
It’s recommended that you stay well under your credit limit on your credit card if you don’t want your credit score to be affected. Your credit utilization plays a big role in the health of your credit score, so you don’t want to spend so much on your credit card that you have little or no available credit left.
If you make a large purchase on your credit card one month, your lender might think that you depend too much on your credit to make purchases, which they’ll view unfavorably. As such, you might notice a drop in your score even if you pay off the entire balance in full and on time.
3. You Applied For a Few New Credit Accounts
Too many new accounts opened within a short period of time can be a bad thing for your credit score. Every time you apply for another credit account, the creditor will pull a “hard inquiry” on your credit to verify your financial health and check out your payment history.
Creditors aren’t usually in the habit of extending credit to those with a bad track record of late or missed payments, so checking your credit is a crucial way for them to make sure you’re a low-risk borrower.
But every time they check your credit, your credit score can drop a few points. And the more accounts you open, the more inquiries will be made, which means your credit can be significantly affected as all those hard inquiries add up.
4. You Recently Closed an Old Account
Old credit can actually be beneficial for your credit score, even if you don’t use it. Financial advisors will often recommend keeping old credit accounts open in an effort to improve credit scores, so closing them can actually have the opposite effect on your score. If you’ve recently closed an old account, your credit score might drop.
5. You Paid Off One of Your Loans
Paying down your debt is typically viewed as a positive thing for a person’s financial health, but sometimes paying off a loan can be a bad thing for your credit score initially. After your loan has been paid off and the account has been closed, you’ll have one less account on your books, which can impact your score.
That’s because having a mix of different types of credit helps establish and maintain a sound credit history, which is therefore good for your score. If you take one account out of the mix, your credit score could decrease.
6. Your Name is on Someone Else’s Delinquent Account
If you co-signed for someone else’s loan, you take on a huge risk if they happen to default on their payments. Some people may not be able to get approved for a loan on their own without someone else’s help, which is why they would need a co-signer to get the loan they require.
If the borrower happens to be very good at making their payments in full and on time each month, your credit score can actually get a boost. But the opposite is also true: if the individual is delinquent on the loan, your credit score can suffer.
7. There’s a Mistake on Your Credit Report
Sometimes a drop in your credit score might not necessarily be your fault. It’s possible that there’s a mistake on your credit report that’s pulling your score down. To find out for sure, you’d have to pull your report (which you can do for free once a year) and review it to see if there are any errors.
If you find any, that could explain the sudden drop in your score. In that case, you should have it investigated and resolved to help bring your score back up to where it should be.
The Bottom Line
There are all sorts of reasons why you may have noticed a drop in your credit score. The key is to identify the exact reason why your score changed for the worse and take steps to rectify it. You can also get in touch with a financial advisor or credit counselor who can guide you on the path to a solid credit score.