Why Did My Credit Score Drop? 9 Likely Culprits

Your credit score is a snapshot of your financial health – a sudden drop can feel like a punch to the gut. Unless something major has prevented you from paying your bills, you might be at a loss for this sudden change. Understanding the reasons behind the decline is the first step to recovery.

This blog will go over 9 common culprits behind credit score drops, giving you the knowledge to diagnose the problem and take action.

The Credit Score Myth – What Doesn’t Affect Your Score

Before we break down the factors that affect your credit score, let’s dispel some common credit score myths. No matter what you may have heard, the following variables do not play a role in your credit score.

• Your income: While a higher income can make it easier to manage debt, it doesn’t directly impact your credit score.
• Your age: Your age doesn’t play a role in credit scoring models.
• Checking your own credit report: Checking your own credit report is considered a “soft inquiry” and does not affect your score.
• Race, gender, marital status, or religion: These factors are not considered in credit scoring.

Payment History – The Biggest Influencer

What affects your credit score most is whether or not you have a history of on-time payments. Before they offer you a loan, banks want to know that they can rely on you to make your monthly payments. For this reason, missed payments and late payments are the most common causes for a credit score drop. Even one missed payment can have a significant impact. The later the payment, the worse it will be for your credit score.

To avoid missed payments, set recurring reminders on your phone, mark them on your home calendar, or enroll in automatic payments. If you do miss a payment, make it as soon as possible to limit the damage to your credit score.

Credit Utilization – How Much You Owe Matters

If you have one or more credit cards, you know that each card has a maximum spending limit. This credit limit is the amount of money that’s available to borrow. Credit utilization is a measure of how much of your available credit you are currently using.

Borrowing a large percentage of your available credit can hurt your credit score. For a positive impact on your score, aim to keep credit utilization below 30 percent. Maxed-out credit cards will significantly lower your credit score and discourage lenders from offering loans. If you want to achieve a high credit score, prioritize paying down your credit card balances. You can also request an increase in your credit limit. As long as you don’t use it, this will lower your credit utilization ratio.

Credit History Length – Time is Your Ally

If you don’t have a credit card, you may unknowingly damage your credit score. Credit history is the amount of time you have been responsibly paying bills and managing loans. Paying monthly rent as well as cell phone and utilities bills are one way to build credit history. Responsibly managing a credit card is another way. You can’t go back in time and start your credit history sooner, so be patient and your score will slowly improve.

New Credit Applications – Hard Inquiries Can Hurt

Don’t rush out and open five new credit cards thinking it will build your credit history or improve your credit utilization ratio. While a lack of established credit history can result in a lower score, so can opening several new accounts in a short period of time. Responsibly manage the accounts you have and slowly introduce new accounts if you desire.

When you apply for credit, lenders perform a hard inquiry which can temporarily lower your score. Too many hard inquiries in a short period are a red flag to lenders as it can signal financial distress. It’s ok to apply for new credit cards, just be selective and allow some time between new applications.

Credit Mix – Variety Can Be a Good Thing

You’ve proven that you can manage your credit card, and banks love that. But what they love more is proof that you can handle a variety of credit types. Student loans, a car loan, and a mortgage create a mix of credit that lenders find reassuring.

There’s not much you can do to improve your credit mix unless you need these additional loans. Just focus on managing your existing credit responsibly and your credit mix will evolve over time.

Other Factors – Less Common but Still Impactful

If you notice an unexpected drop in your credit score, you need to investigate. Here are four sneaky reasons your credit score might have dropped.

• There are errors on your credit report. It’s important to check your credit report once a year for accuracy. Dispute any errors you find in order to reverse damage to your credit score.
• You are closing old credit accounts. Closing old accounts can shorten your credit history and reduce your available credit, both of which can lower your score.
• You accidentally let a debt go to collections. Collection accounts and public records can significantly damage your credit score.
• You are a victim of identity theft. If someone is using your information to open accounts or make purchases, it can wreak havoc on your credit. Keep a close eye on your accounts with mobile banking.

Rebuilding Your Credit – A Strategic Approach

Bad credit can happen to anyone. Whether it’s from a series of small events or one major event like losing your job, it’s important to remember that you can rebuild. Fixing your credit doesn’t happen overnight. Take it step by step and stay committed. Here are five steps to rebuilding your credit.

1. Pay bills on time: This is the most crucial step in improving your credit.
2. Reduce debt: Focus on paying down high-interest debt first.
3. Become an authorized user: If someone with good credit adds you as an authorized user on their account, their positive payment history can help boost your score.
4. Consider a secured credit card: This can be a good option for rebuilding credit if you have a limited or damaged credit history.
5. Monitor your progress: Regularly check your credit reports to track your progress and ensure accuracy.

Take Control of Your Credit

Knowing what factors influence your credit score is the first step to raising it. Whether you need to consolidate debt, open a new credit card, or expand your mix of credit, the Dieterich Bank team is here for you. We can help you find the financial products and services needed to achieve your credit score goals. Give us a call or stop by one of our convenient locations in Dieterich, Effingham, Newton, St. Elmo, Breese, Edwardsville, Red Bud, Columbia, Waterloo, and Chester.