Why did my credit score drop?

Having a good credit score can help you get access to better financial opportunities. So if your credit score dropped recently, you may be wondering what to do about it.

Once you know what caused your credit score to go down, you can usually help improve it with a few easy steps.

Here’s what we’re going to cover:

• What goes into a credit score?
• Eight reasons your credit score might drop, and what you can do to help improve it
• Oportun: Affordable loans, no credit history required to apply

What goes into my credit score?

Your credit score is a number between 300 and 850 that gives businesses an idea of how likely you are to make payments on time. Your credit score is based on your credit history.

In the United States, most lenders pull credit reports from the three major national credit bureaus, Equifax, Experian, and TransUnion. These credit reporting agencies rely on the FICO® scoring model. Here’s how FICO calculates your credit score:

• 35 percent: Payment history
• 30 percent: Current debt
• 15 percent: Length of credit history (how long you’ve used credit)
• 10 percent: New credit (recently opened accounts and hard inquiries)
• 10 percent: Credit mix (types of credit accounts)

If any of these factors have changed recently, there’s a good chance that your credit score will also change. It can take anywhere between 30 and 90 days for updated information to be incorporated into your credit score.

Eight reasons your credit score might drop, and what you can do to help improve it

Now let’s look at some common reasons your credit score might drop with the national credit reporting agencies. In each case, there are steps you can take to help bring your score back up again.

1. Missed payments

Your payment history is the most important part of your FICO score. Even one late payment can lower your credit score. If your payment is over 30 days late, it may be reported to the credit bureaus. If it’s over 60 days late, your account may be sent to a collection agency.

Typically, late payments stay on your credit report for seven years. That’s one reason why it’s so important to make all your payments on time.

What you can do: If you can afford to make the missed payment, this is the best option. If you can’t, then reach out to your lender to see if they can offer a reduced payment plan or have other payment options.

If your account has already been sent to a collection agency, you can contact the agency directly and set up a payment plan.

2. Derogatory marks

A derogatory item is any negative information listed on your credit report.

Late payments are a common cause of derogatory information. Other sources of derogatory information include a bankruptcy, a foreclosure, or a repossession. Derogatory information can stay on your credit report for up to 7 years.

What you can do: Make sure that the cause of your derogatory information was reported accurately. If it’s not accurate, you can file a dispute with the credit bureaus. They are required to take action within 30 days.

If the derogatory information is accurate, developing better credit habits can help improve your score over time.

3. High credit utilization ratio

Anytime you use a credit card to make a large purchase, your debt increases. When calculating your credit score, FICO looks at how much you currently owe on your credit cards compared to your total credit limit. This is called your credit utilization ratio. To calculate it, divide your credit card debt by your credit limit.

Here’s an example: Let’s say you have one credit card with a credit limit of $1,000, and you carry a balance of $200 on your credit card. This means your credit utilization ratio is 20 percent.

Then let’s say you use your credit card to buy a new home appliance costing $400, increasing your balance to $600. This means your credit utilization ratio increases to 60 percent. This increase could lower your credit score.

What you can do: To keep your credit score higher, experts advise you should maintain a credit utilization ratio of 30 percent or less. Making payments to lower your credit utilization ratio may help your credit score.

4. Closed accounts

The length of your credit history is based on open accounts and counts for 10 percent in the FICO scoring model. Closing a credit card account can have a negative effect on your credit score if it reduces the length of your credit history.

Let’s say you have two credit cards, one that you’ve had for 10 years and another that you’ve had for five. If you close the 10-year-old card, it will no longer contribute to the length of your credit history and could shorten your credit history. A shorter credit history often means a lower credit score.

What you can do: Maintain your accounts in good standing. There may be situations where closing an unused credit card account is a smart decision—like if you’re paying fees just to keep it open. Just remember that closing it might also result in a lower credit score.

5. New credit applications

When you submit a formal application for credit, the lender will typically make a hard inquiry into your credit report. This temporarily lowers your credit score.

What you can do: Your credit score will go back up again in a few months, so you don’t need to take any action. You may want to avoid applying for more credit during the next six months.

6. Loans paid off

Paying off a loan is a big accomplishment. There’s just one drawback: It reduces your credit mix, or the variety of credit accounts you have open.

To keep your credit score high, you generally want to have both credit cards and loans. This shows lenders that you know how to manage different kinds of credit.

But it’s still good to pay off a loan, even if it causes a slight drop in your credit score.

7. Identity theft

Identity theft is a serious crime. If someone steals your identity, they can apply for new credit under your name or spend money using your credit cards.

What you can do: If you suspect your identity has been stolen, it’s important to take action right away. Here’s what to do:

• Place a fraud alert with the credit bureaus
• File an identity theft report with the Federal Trade Commission
• Freeze your credit accounts

To protect against identity theft, it’s a good idea to check your credit report regularly. That way you’ll notice any suspicious activity at once.

8. Errors in reporting

What if none of these things has happened, but your credit score still went down? What else could have caused it to drop?

It’s possible that one of the credit bureaus made an error. Review your credit report to make sure everything listed is accurate.

What you can do:If you find an error on your credit report, file a dispute with the credit bureau. After they correct their records, your credit score should return to where it was.

Oportun: Affordable loans, no credit history required

Now that you understand what may have caused your credit score to drop, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about:

• Personal loans
• Credit cards
• Secured personal loans
• And more!

Sources:

FICO. FICO® score education

Experian. What “derogatory” means in a credit report

Experian. What is a credit utilization rate?

Consumer Financial Protection Bureau. How do I get and keep a good credit score?

Consumer Financial Protection Bureau. Credit score myths that might be holding you back from improving your credit

Consumer Financial Protection Bureau. What’s a credit inquiry?

Federal Trade Commission. What to know about credit freezes and fraud alerts

Federal Trade Commission. Report identity theft

The information in this site, including any third-party content and opinions, is for educational purposes only and should not be relied upon as legal, tax, or financial advice or to indicate the availability or suitability of any Oportun product or service to your unique circumstances. Contact your independent financial advisor for advice on your personal situation.

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