Why Is My Credit Score Dropping?

From late payments to identity theft, here are the most common things that can cause your credit score to drop—and what you can do to recover your good standing.
Written by Sarah Gray
Reviewed by Brittni Brinn
Some of the biggest factors that could contribute to a drop in your credit score include late payments, hard inquiries on your credit report, and increases in your credit utilization ratio.
Seeing your credit score fall is never a good feeling, but knowing what caused the drop is the best way to ensure a quick recovery. Here to help you understand the most common reasons for a drop in your credit score is the nation’s top
car insurance
comparison app,
Jerry
In this article, you’ll find explanations for drops in your credit along with suggestions for how to recover from them. Plus, we’ll give you some hints to help you get a great rate on a major factor in many consumer’s credit scores: your
car loan
!
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Why does your credit score drop?

Your credit score can increase and decrease for any number of reasons, but when it comes to dropping credit scores, there are often a few key factors that have the largest effect. Of all the things affecting your credit, derogatory marks will have the largest impact. Though all derogatory marks will negatively affect your score, some will have a greater impact than others. 
Here are a few situations that can lead to derogatory marks on your credit report:
  • Late payment
  • An account in collections or a charge-off
  • Bankruptcy or foreclosure
  • Judgment
  • Tax lien 

Late payments

On-time payments account for 35% of your FICO® score, making it the single most important factor in the calculation. If you’re more than 30 days behind on a payment, creditors issue a report to all three major credit bureaus—Experian, TransUnion, and Equifax—which can cause a substantial and immediate drop in your overall score. The longer the delinquency, the greater the impact on your score. 
While late payments don’t always signal failing finances, they’re almost always the precursor to major financial events—like collections, bankruptcies, or foreclosures. All of which will negatively impact your credit score for years to come.
Key Takeaway Making payments on time is the single greatest factor affecting your overall credit score.

Collections, Bankruptcy, or Foreclosure

Making late payments can often snowball into missing payments entirely. When this happens, your credit card issuer is likely to charge-off your account and send it to collections. These actions will be added to your credit report, negatively impacting your score.
Though having an account sent to collections is certainly bad, bankruptcy is the most harmful single event to a borrower’s credit history, and foreclosures are only slightly less hurtful. Each will continue to affect your credit score for at least seven years, and a Chapter 7 bankruptcy will remain on your report for 10 years.
Less common situations that can also have an effect on your credit score include things like judgments and tax liens. These both represent additional claims on your finances and property that can affect your ability to pay off loans, which is why they affect your credit score.
But derogatory remarks aren’t the only things affecting your credit score. A lot of your score depends on the ways you use your available credit. Let’s see how your credit usage could potentially impact your credit score.

High credit utilization ratio

When it comes to utilizing credit, there’s a delicate balance that needs to be reached between too much and little. This balance yields an optimal credit utilization rate
This ratio is calculated by adding together all the available credit you have and dividing it by the amount of money you owe. So, if you have a total credit limit of $10,000, and you tend to charge about $2,000 a month, your utilization ratio will be 20%. The lower your utilization ratio, the higher your credit score.
Keep in mind that to maintain a solid utilization ratio, you need to be making more than just the minimum payment on your account. If you continually add to your balance without paying off what you’ve already spent, or you make an abnormally large purchase, your utilization ratio will increase, and your credit score will likely fall as a result.

A hard inquiry (or a few)

If you’ve recently applied for a mortgage, new credit card, personal loan, or new credit line, you should expect to see at least a slight dip in your credit score. 
When you apply for additional credit, your potential lender does a credit check, which records a hard inquiry that can affect your record for up to two years, but usually disappears in about one. The older your credit history, the less credit inquiries will affect your score. However, the more hard inquiries you have in a short period of time, the higher the impact on your score.

You paid off a loan

Paying off credit card debt can improve your overall credit score, but paying off installment loans can have the opposite effect. Maybe you just paid off your student loans, or you’ve finally gotten out from under that huge mortgage. While these are both great for your overall finances, they also take the diversity out of your credit profile. 
10% of your FICO® score is calculated on your ability to manage different types of credit, so if all you have are lines of credit, even if you make all your payments on time, your score may be lower than someone with a diverse credit mix.
Keep in mind that the effect paying off a loan will have on your score will be slight. Saving money on interest is worth much more than gaining a point or two on your credit score, so don’t hesitate to pay off that loan if you’re able!
While you have a lot of control over your credit score and its ups and downs, some things may seem a bit outside of your control. Let’s consider some things that can affect your credit score that don’t necessarily have anything to do with your payment history or spending habits.

Reduced credit limit

Another common cause for dropping credit scores is decreased credit limits. When you initially apply for credit, your lender looks at a number of factors to determine if they will approve your line. Key among these are your current debt-to-income (DTI) ratio and your current gross monthly income
If your DTI increases dramatically, or your income drops dramatically, your creditor may decrease your line of credit. This decrease will result in an increase in your credit utilization ratio, which will result in a lower credit score.
Another way your credit limit might decrease is if you choose to close one of your accounts. That’s right—closing a credit account can have a negative impact on your credit score because it, too, will increase your credit utilization ratio. So, while it may seem counterintuitive, if your goal is to achieve a great credit score, you shouldn’t be aiming to lower the amount of available credit you have to use.
If you do choose to close a credit card account, aim to close one of your “youngest” accounts. The length of your credit history makes up 15% of your FICO® score, so the higher the average age of your credit accounts, the higher overall score you can achieve. 
The only exception to this would be if you’re closing an account to rid yourself of an unnecessarily high annual fee or monthly fee. The money you save over time on these fees will be worth more than the few points you lose for shortening your credit history.

Victim of identity theft

Having someone steal your identity is probably the most frightening situation that will result in a drop in your credit score. If you notice inaccurate information reported on your credit history, it could be a sign that someone has stolen your identity. However, it could also simply be a reporting error—either way, the information in your credit file is not representative of your legitimate spending and borrowing practices. 
MORE: How breaking a lease can affect your credit

How to improve your credit score

Maintain a good payment history

Since late payments can have the biggest impact on your credit score, it makes sense that on-time payments will have an equally big effect. The most crucial step in obtaining and maintaining a strong credit history and score is making on-time payments.

Pay off credit card debt

Remember that credit utilization ratio? Your goal should be to always keep it below 30% if you’re looking for a good credit score, but if you really want a stellar credit score, aim to pay your credit card balances down to $0 each month. Not only will you maintain a nice low utilization ratio, but you’ll also save yourself tons of money in interest.

Practice responsible spending habits

Responsible spending is about more than just staying within a set budget—though that’s the starting point. It also means avoiding adding credit where it’s not needed. Sure, that store-brand card may give you a great deal on your purchase today, but it will also affect your credit utilization ratio, earn you a hard inquiry mark on your history, and tempt you to spend outside of your budgeted limits. 

Monitor your credit

Consumers have countless options when it comes to monitoring their credit score, and most are completely free. Visiting sites like
annualcreditreport.com
allows you to get a free copy of your credit history every 12 months. Enabling fraud alerts on your credit cards and other financial accounts is another great way to keep an eye on your history with no extra effort.
An even better idea, though, is to check your credit score often, say on a monthly basis, to ensure you notice any fluctuations that could indicate inaccuracies or issues in time to address them quickly. 
Here are some popular free credit monitoring services you can use to keep an eye on your score:
MORE: Does refinancing a car hurt your credit score?
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How to get better car loan terms

For many of us, an auto loan is the largest debt included in our credit profile. While wiping out this debt can take several years, there’s a lot you can do in the meantime to help save yourself money to put toward lowering your principal or paying off other debts.
With
Jerry
, you can refinance your
car loan
to lower your APR or reduce your monthly payment. It couldn’t be easier—if you already use Jerry’s
car insurance
comparison app, we’ll reach out to see if you’re interested in refinancing to get a better car loan. If you are, we’ll work with our lending partners to find you the best terms so you can keep more money in your pocket every month. 
On average, Jerry refi customers lower their payments by $118 a month!
“This was the coolest insurance company I’ve seen so far. They saved me $1200 and their Ux is stellar. Go
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FAQs

The single best way to ensure you maintain a solid credit score is to make all of your payments on or before their due date. In addition to on-time payments, minimizing your overall debt, practicing responsible spending habits, and monitoring your credit regularly will all help you achieve and maintain a good credit score.
Most scoring models use a range of 300 to 850 for credit scores. In this model, a good credit score will fall between 700 and 800, while anything above 800 is considered exceptional.
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