The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
Your credit score helps lenders determine whether to approve you for loans, lines of credit and more (and under which terms). When you apply for financial products, banks and other institutions can use this number as a predictor of how likely you are to pay back the money you borrow. That’s why it’s important to build and maintain great credit long-term.
But if you already regularly track your credit score, what happens when you find a lower number than you expected?
Here are some reasons your credit score may drop, and what to do if it does:
Reasons your credit score may have dropped
Your credit report contains errors
You can get reports from all three credit bureaus for free at AnnualCreditReport.com. You may have to pay for your scores unless one of your credit card companies or your bank offers access to your credit score for free.
Here’s why it’s important to get this information: Every month millions and millions of pieces of data arrive at the credit bureaus to be posted. Most are right on the money, but some could use help finding the right home. Anything from misspelled name to a mixed-up account in the lenders’ records, a “junior” that should have been a “senior” suffix and more can get someone else’s data on your report.
With all three reports, you’ll be able to find any discrepancies faster. Also, not all bureaus have the same information. They compete for business both in and out of their files, so some lenders may only report to one bureau and not the other two. If there are errors, you may find very different scores at each credit reporting agency.
If you see anything you don’t recognize as yours, something that is more than seven years old or missing information, be sure to follow up using each bureau’s credit report dispute process. They want accurate data as much as you. If the data is incorrect, that’s not good for a competitive business or for you.
Your balances are too high
It’s a step in the right direction to pay above the minimum payment on any credit cards with debt balances. However, if the interest being charged is making your balances go up, it can hurt your score and cost you money.
To get your credit score up, consider starting a debt payoff strategy. If you have more than one card with a balance, you might choose to pay down the smallest card balance first. While this won’t increase your score significantly, keeping debts low is great for your credit health long-term.
Some accounts don’t appear on your credit report
Some lenders don’t report to the bureau every month, so look for payments that should be there but are not. Remember, it costs the lender money to tell the three bureaus you’ve paid a bill. Auto lenders may be quick to repossess a car if you miss a payment but may find little advantage in reporting a paid-off loan instantly. So, it may take a longer period for that good news to get published.
You closed some credit card accounts
Have you paid off any credit cards and then closed the accounts? If you do this, the utilization points in your score will go down because you lose the available credit from those cards.
This is one reason it is important not to cancel credit cards if you can prevent it. These credit limit limes are tied directly to your credit utilization ratio, which counts for 30 percent of your overall FICO score. Try to keep credit cards open whether you use them or not — unless you are being charged a large annual fee for a card you don’t use.
Here’s a tip: If you have two cards from the same issuer bank when you close one, ask to have the credit limit on the closed account added to your remaining open account. This keeps your utilization factor low while saving you an annual fee.
Your credit history has gotten shorter
If you have recently closed any other accounts, it may have impacted your credit history. Credit history is how long you’ve had credit being reported in your name. In the world of credit reporting, older is better than younger. This is why it is harder for some young people to build up their scores.
If you did close any credit cards, they may count in your credit history age until they fall off of your credit report. (As a side note, your car note would not affect the utilization portion of your score, for example, since installment loans are given for a set amount of both time and money.)
What affects your credit score?
Now, what is actually going on with your score after a drop? Let’s review with a brief FICO score primer. The five basic components in order of importance are:
- Payment history (35 percent)
- Credit utilization (30 percent)
- Length of credit history (15 percent)
- Credit mix (10 percent)
- New credit (10 percent)
As you work to improve your score, good credit habits like making on-time payments in full and paying down balances will impact most, if not all, of these components. But you must also remember that what went on before has some bearing on your overall score.
We’ve already discussed payment history, credit utilization and credit history. The last two sections (credit mix and new credit) only account for 10 percent each, so they’re not huge contributors to your score. But that doesn’t mean they don’t count at all.
While car payments, for example, aren’t a factor in utilization, they have a direct impact on the credit mix portion of your score. Lenders like to see that borrowers can handle both revolving credit (credit cards, etc.) and installment debt (car notes, mortgages, etc.) on a monthly basis. Once your car notes are paid off, you lose those points. You still have your good payment history on those notes and that history will stay on your credit reports for 10 years. But credit cards alone will not do much for you in the credit mix department.
Getting denied for a credit card you apply for can have even more of an effect since you wouldn’t have the newly available credit to balance out the impact of the hard inquiry. This is why it is important to have a fairly good idea that you will be accepted before you apply for new credit.
New credit is also an area where you should pay special attention when going over those credit reports. If someone has hijacked your information to open new accounts in your name, you will be able to see it on those reports. Then you will need to take the necessary steps to have those accounts removed and to protect your identity. See what steps you need to take if you suspect identity theft.
The bottom line
Losing a significant number of points from your credit score can feel like you have dropped off a cliff. Thankfully, there are steps you can begin taking today to get your score back on track and benefit your overall financial health in the long run.