What we’ll cover:
If you’ve been monitoring your credit score, chances are that each time you check it you’re hoping for improvement – or at least the same score as last time.
Learning your credit rating dropped since the last time you checked can be jolting. And it can leave you with a single question.
Why did my credit score drop?
Here are some reasons your credit score may have dropped recently.
First, check to see if you’ve let any payments slip through the cracks. It’s unsettling to realize you’ve missed a payment, but it does happen. Pro tip: enroll in autopay to avoid missing any payments in the future.
If you’re more than 30 days late on a payment, creditors can then report it to credit bureaus, which could in turn damage your score.
How many points your credit score drops depends on a few things, including how long the bill goes unpaid. According to FICO data, an unpaid bill from three months ago can bring down your score more than an unpaid bill from 30 days ago.
Your score prior to missing the payment and whether or not you’ve missed payments before makes a difference, too. Someone with a 780 credit score and no prior missed payments could see a 90- to 110-point drop as a result of a 30-day delinquency. On the other hand, someone with a 680 score and two previously missed payments ranging from 1-2 years ago could see a 60- to 80-point drop.
You know how it seems that in life, the better you do, the higher standard you’re held to? The same line of thinking applies to credit scores.
Your credit utilization ratio – how much of your available credit you’re using – factors into your credit score. So if one or more of your credit card balances went up, you may see a dip in your credit score.
Here’s an example: You book two international plane tickets and two weeks’ worth of hotel rooms on your credit card that has a $10,000 limit. Suddenly you’ve gone from carrying a low balance of a few hundred dollars to carrying a balance of $6,000. Even though you have a plan to pay down this balance over time, you’re still using 60 percent of your available credit.
It’s generally recommend that you keep your utilization to 30 percent or below. Lowering your utilization rate as soon as possible – per card and overall – by paying off this balance can help you nudge your score back up.
Applying for a loan or credit card triggers a hard inquiry into your credit history, which would typically drop your score by 5 to 10 points. That being said, hard inquiries for new lines of credit are quite normal – after all, you’ll probably need to apply for a mortgage, auto loan or credit card loan several times over your life. An occasional drop of a few points here and there probably won’t ruin you.
However, this may become an issue if you apply for, or open multiple lines of credit within a short timeframe. This behavior can make you appear riskier to lenders, so be mindful of how often you’re applying for new credit.
Another possible reason for why your credit score dropped could be your closing some unused credit accounts, causing your credit utilization ratio to rise and the average age of your accounts to fall.
On the one hand, wanting to get rid of unused or old credit cards isn’t necessarily wrong. In fact, it may help you curb your spending. But on the other hand, instead of closing those accounts, just keep those cards somewhere other than your wallet (or stored on your phone). This way, you’ll still enjoy the benefits of an established account history without being tempted to use them. Out of sight, out of mind.
First of all, congratulations! But now you might be scratching your head wondering: Why did my credit score drop after paying off debt?
If you find your credit score has dropped slightly after paying off an installment loan, like on a car or home, take a look at your credit mix. If that was your only credit line, your score may have dipped by a few points.
Luckily, your credit mix only accounts for a small percentage of your overall score. Even better is that the benefits of paying off debt – like having more money for your savings and investment goals – outweigh the slight, temporary effect on your credit score.
If you’ve read through all these reasons and are still wondering why your credit score dropped for no reason, it may be worth double-checking your credit report to ensure it’s free from errors and that you haven’t become the victim of fraud. If either of these seem to be true, you can dispute the error or place a fraud alert on your credit report.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.