Finances (US)

Why did my credit score drop?

Why did my credit score drop? Learn the main reasons your credit score dropped, and check out how to increase it by following our simple tips!

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by Aline Augusto

Published on 08/03/2022

What are the factors that affect your credit score? 

Why did my credit score drop? Check the reasons why that might have happened. Source: Adobe Stock.
Why did my credit score drop? Check the reasons why that might have happened. Source: Adobe Stock.

Imagine you need to get credit to accomplish something you have always wanted. When checking your credit score, you suddenly realize it is lower than it used to be. The first thing you’d ask yourself is “why did my credit score drop?”.

Do you know the cause of that? And how to avoid it? What about how to increase it and maintain a good credit score?  

You might find it silly, but keeping a good credit score means you have sustainable financial health. And that’s important because it shows the market you are in control of your finances, the same way you are a responsible person.

Check out the factors that affect and drop your credit score!

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What is a credit score? 

What is a credit score and how do they work?
What is a credit score and how do they work?

The credit score is punctuation which ranges from 300 to 850, with being 300 as the lowest credit score and 850 being the highest.

This punctuation shows the market how responsible and reliable you are, which means the better your credit score is, the best options of financial products and services you will get.

That’s why it is important to maintain good punctuation, usually from 690. 

But it is impossible to work on your credit score if you have no idea which factors affect your punctuation and financial health.

Also, it is essential that you access your credit score from time to time to follow your reports and history and avoid surprises.

Now, learn the main factors that drop your punctuation and affect your creditworthiness.  

Missing and late payments

The first and main reason why your credit score drops is missing a payment. Your good payment history shows the market that you honor your obligations. On the contrary, in case you have late payments or missing ones, these will negatively affect your credit history and therefore impact your credit score.

In summary, the credit score is based on a model called FICO® Score. And the missing or late payment factor accounts for 35% of the punctuation calculated based on that scoring model.

Let’s suppose you have a late payment that is over 30 days past due. Probably, the credit issuer will report that to the credit bureaus. When it happens, your report will show delinquency, and as a result, your score will drop.

In case you don’t pay this delinquency, the credit issuer can send it to a collection agency. And as a result, it will be recorded on the reports, as well.

So, it is essential that you control your debt, create financial planning, and stay updated about your payments.

If you don’t have enough money to pay off your bills, recognize the problem and make a plan to solve it or negotiate it.

Recently applied for many lines of credit

Applying for many lines of credit may negatively affect your credit score, even though for a short period of time, mostly like a year.

Lines of credit could be credit cards, mortgages, loans, and so on. 

Every time you apply for a new line of credit a hard inquiry is filed on your credit reports. For example, if you want a new credit card. The card issuer will review your creditworthiness by doing that process.

So, your credit score may drop if you apply for various lines of credit in a short period of time. This won’t last long, and you can recover. But, keep in mind you must be careful about it.

Also, applying for many lines of credit might mean you have no control of your finances. 

Therefore, only apply for them if you really want.

Furthermore, in the case of credit cards and loans, choose those that offer prequalification processes. Usually, prequalification doesn’t impact your credit score.

Big change in your credit utilization 

Another big factor that impacts your credit score is how you use your credit limit. The credit utilization rate determines how much of your credit you normally use.

Specialists recommend that this rate stays below 30%.

For example, if you have a $5,000 credit limit, you should use $1,500. 

But, let’s suppose you make a big purchase in one month and use $4,000 instead of that 30% recommended. As a result, your credit score will be affected and drop.

Credit limit has decreased 

Following the explanation above, if your credit limit decreases, your credit utilization rate will automatically increase in case your balance remains the same.

There are many reasons a credit card issuer may decrease your credit limit. For example, if you haven’t used the card much or if you have a lot of missing payments.

So, keep in mind it is essential to understand your credit utilization rate and make sure you have control of your finances.

An error in your reports 

It is rare, but it may happen. It is really important you keep an eye on your credit reports because mistakes could lower your punctuation.

For instance, inaccurate information in your credit report might lead a credit issuer to wrong information. 

Also, you may have fallen into fraud. 

Therefore, stay tuned about your credit score and reports.

Identity theft 

The nightmare of identity theft might happen to any person, including you. And if it happens, your credit score may drop because, in most cases, the people who stole your identity may have applied for multiple lines of credit and other financial products.

So, it is crucial you have fraud alerts activated in your reports, the same way you have your accounts, identity, and financial products secure.

Bankruptcy or foreclosure happened

Both bankruptcy and foreclosure events impact hard your credit score. If you can’t manage to pay off your loan or in case you lose your house to a mortgage lender, your credit score will be negatively affected the same way you be disqualified for many future lines of credit.

That’s why it is essential to maintain financial planning updated and only apply for a loan if the terms fit your finances.  

How to increase my credit score?

Learn how to increase it with our simple tips. Source: Adobe Stock.
Learn how to increase it with our simple tips. Source: Adobe Stock.

If you have experienced one of the factors listed above, you probably have seen your credit score drop. 

But, it is not impossible to increase it. Although it is not a fast process, our simple tips might help you out.

Find out more in the next post!

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About the author

Aline Augusto

My name is Aline Mesquita; I'm a writer here on the blog, where I write about finance in general and other subjects. I have been working with content creation for ten years. Also, I'm post-graduated in Project Management, with expertise in SEO practices. Currently, I am studying finance, market trends, and cryptocurrencies.

Reviewed by

Aline Barbosa

Senior Editor

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