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Why did my credit score drop for no reason?

why did my credit score drop for no reason?

Your credit score will not drop unless there is a reason. Common reasons include increased credit usage, late or missed payments, hard inquiries, and closed accounts. Identity theft or fraud, while less likely, may also be the cause. And so, although a credit score drop can seem to come out of nowhere, many factors can affect it. 

In this blog, we’ll take a closer look at your credit score and the financial elements that make it up. Then, we’ll show you what can cause your credit score to drop and how to put it back on the right track.  

Where Does My Credit Score Come From?

Your credit score is determined by five major factors, listed below with the percentage of their impact on your rating:  

Payment History (35%) 

Your payment history is the record of your payments to the people and businesses that you owe money. In addition, lenders want to know if you’re going to repay their loan, making your payment history the most crucial part of your credit score. This is why every path to rebuilding credit and maintaining a good score starts with paying bills on time.  

Credit Utilization (30%) 

Your credit utilization ratio is a number that details available credit you are using at a given time. For example, let’s say you have a credit card with a $500 limit. At the end of the month, your balance is $125. That would mean that your credit utilization ratio is 25%. A credit utilization ratio of 30% or below will do wonders for your credit score.  

Credit History (15%) 

Long credit history is an excellent way to show creditors that you are trustworthy and likely to continue being so. In addition, a long credit history is evidence of responsible credit management over a long period.

New Credit (10%) 

Opening several new accounts in a short period can affect your credit score. This is because it may look to a lender that you are in a bad financial situation.

Credit Mix (10%)

Your credit mix is the variety of credit accounts you have, which tells creditors about your ability to repay debts. In addition, having a variety of accounts can show that you can manage a new loan or line of credit. For example having a good mix of secured loans (mortgages, auto loans, etc.) and unsecured loans (payday loans, personal loan options, etc.) may help this factor.

Credit Bureaus and Your Credit Score

Credit bureaus or agencies provide the banks, lending institutions, and individuals with information about consumer spending trends and habits. The three major credit reporting agencies for consumers in the United States are Experian, Equifax, and TransUnion

The details on your payment history and those of the other factors are compiled into files called credit reports. These reports are then made available to anyone looking for financial information about you. If you have ever rented a home, bought a vehicle, or applied for a credit card, you most likely have a credit report.  

evaluate all of your activity and calculate your credit score—a three-digit number ranging from 300-850 (for the most popular credit scoring model—the fico score or fico credit score: 

Credit RangeCredit Rating
800-850Excellent Credit
740-799Very Good Credit
670-739Good Credit
580-669Fair Credit
300-579Bad/Poor Credit

Getting low interest and reasonable loan terms can be easy for people with good credit. With a history of paying bills on time, these individuals are likely to continue making payments. On the other hand, a person with bad credit may be given a high-interest loan by a lender. This is because a lender is more likely to provide them with the loan to increase their chances of repayment. 

Because of the vast difference between good or bad credit options, having an accurate credit score is very important. It could make the difference in getting the loan or credit line you need in making many of life’s dreams come true.  

Reasons Why Your Credit Score Dropped 

So, now that you know what makes up your credit score let’s look at some of the primary reasons your credit score could drop without warning.  

Credit Limit is Reduced

It may seem odd that having less credit would be something that would cause your credit score to drop. However, when your credit limit is reduced, your credit utilization will rise faster. 

If you notice a change in your credit score after a credit limit reduction, take a look at your utilization rate. And so, credit limit can definitely impact your score. 

Paying Off A Loan

If you thought that your credit score dropping by having less credit was confusing, consider this fact: paying off a loan can lower your credit score, too! 

When you pay off a loan, you essentially get rid of one of your credit accounts. That means that your credit mix—that variety of accounts can prove you do well with managing your debt. But, on the other hand, one less loan means one more minor piece of obligation to work, so your credit mix decreases. And since you’ve weakened an aspect of your credit, your overall credit score can take a dip. 

Closing a Credit Card Account With a Credit Card Issuer

Just like paying off a loan or other credit account, closing a credit card account is another way that favorable action can hurt your credit score. Not only does closing a credit card get rid of an account (which affects your credit mix), it will also decrease your available credit. If you don’t reduce your spending, that new lack of recognition could create a high credit utilization ratio. 

If the credit card was an older account, closing it with your credit card issuer will also affect the average length of your credit history, showing lenders that you can manage credit well over time. 

Hard Inquiries On Your Credit Report 

Credit inquiries can hit a credit report in two ways: soft questions and complex queries.  

  • Soft inquiries are glances at your report that have nothing to do with approving you for any loan or financing. These types of inquiries are mostly done during background or identity checks. 
  • Conversely, when a financial company reviews your report with the intent to make a lending decision, this is known as a hard inquiry. 

And unfortunately, hard inquiries can temporarily lower your score by a few points, sometimes hurting a good credit score. 

Hard inquiries can stay on your report for up to two years. However, their impact will lessen over time, especially if you continue to keep practicing good habits that don’t negatively impact your credit report. 

Dispute Credit Report Errors

Sometimes the reason you see a credit score drop on your report can be a simple one: human errors and technical glitches on your credit report. 

If your credit score changes without any unusual activity on your part, a look at your report may help you find the cause. Often, credit reports can have information on your account that is either outdated or incorrect. A study of the credit reporting industry, conducted by the Federal Trade Commission (FTC), found 20% of consumers (or one in every five) have at least one error across their credit reports.1

Fortunately, the process for disputing credit errors has never been more straightforward. Each credit bureau can receive disputes online through each of its websites. Additionally, many credit monitoring apps and websites can send arguments to the bureaus for you. Conflicts typically take about 30 days to resolve. You can dispute errors on your report at any time, for free. 

Identity Theft 

Sometimes, the reason that your score has dropped isn’t so easy to fix. Let’s take a look at the most concerning reason for a drop in your credit score: You could be the victim of identity theft. 

Identity theft is the act of someone using your personal information without your permission. This information could include your name and address, credit card, bank account, or medical insurance information. Identity theft is quickly becoming one of the most common crimes in America today. According to the FTC, instances of identity theft doubled between 2019 and 2020.2

No matter who it happens to, Identity theft is a serious crime. 

If you discover that an impostor uses your identity, know that you can decrease or even reverse some of the negative impacts. The key is taking quick action.  

How To Handle Identity Theft

The first thing to do when you discover theft with your identity is to report it. Contact the Federal Trade Commission at 877-438-4338 or by visiting IdentityTheft.gov. Filing with the FTC will help preserve your rights and clear fraudulent items on your credit report. 

You can also add a fraud alert to your credit report with each of the major bureaus for credit. 

  • Unlike a credit freeze that disables any credit inquiries, a fraud alert is a warning set up to alert you when your report is being accessed. 
  • When a fraud alert is posted on a report, potential lenders are required to contact you and verify your identity. If you receive a call from a lender you don’t know, that can tip you off that someone is trying to use your identity.  

FAQS: Why Did My Credit Scores Drop for No Reason?

What impact do public records and collections have on my credit score?

Public records and collections, including bankruptcies, foreclosures, liens, and collections from past accounts or missed payments, can significantly impact your credit score. These items can stay on your credit report for several years, indicating a higher risk to lenders, especially if they are related to credit card payment defaults or issues with auto loans, leading to a lower score.

How can I improve my credit scores if they have been affected by theft or fraud?

If your credit scores have been impacted by theft to your identity or fraud, especially involving loan or credit card accounts, the first step is to report the fraud and place a fraud alert on your credit reports. Work on disputing fraudulent transactions and accounts, including unauthorized credit card charges or opened accounts. Regularly monitor your credit reports to ensure no new fraudulent activity occurs.

Are there specific strategies for improving credit scores that have dropped due to high credit utilization rate?

To improve credit scores affected by high credit utilization, often caused by high balances on credit cards or loans, start by paying down existing debt to lower your overall credit utilization ratio. Aim to keep this ratio under 30%. Additionally, be cautious about opening new credit, as this can affect your score by a few points due to the temporary impact of hard inquiries.

What role does the length of credit history play in my credit, and how can I use it to my advantage?

The length of your credit history, which includes the duration of past credit accounts like credit cards and auto loans, contributes to your score by demonstrating a longer track record of managing credit. Keep old accounts open, even if they have a high credit limit but are not used frequently, as they contribute to a longer credit history and can positively impact your score.

What are some effective ways to monitor my credit score and ensure it remains healthy?

To effectively monitor your credit score, regularly check your credit reports from the three major credit bureaus. Use credit monitoring services that alert you to changes in your credit report, such as new credit card applications or changes in your credit limit. Practice good credit habits, including timely credit card payments, not maxing out your credit limit, and maintaining low credit utilization, to ensure your score remains healthy.

In Conclusion With CreditNinja

Discovering a credit score drop can be an unpleasant surprise. But, remember that for every issue that surrounds your credit score, you have the power to make a positive impact. All that it takes is for you to make your financial health an essential aspect of your life. Think about protecting your credit score the same way you would protect your family, home, or prized possessions. Would you leave your home and not lock your door? The same should go for your credit. 

That kind of dedication will lead you to not only watch out for your credit score but also learn how to protect it. 

To learn more about credit scores, such as why your credit score dropped after a dispute, check out the CreditNinja Dojo!

References:

  1. In FTC Study, Five Percent of Consumers Had Errors on Their Credit Reports | FTC 
  2. Identity Theft Cases Doubled from 2019 to 2020 | AARP

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