Why Did My Credit Score Drop?

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Checking credit score
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You probably know that your credit score can drop if you don’t use credit responsibly. But there are also some less than obvious things that can cause your score to go down.

Team Clark’s Consumer Action Center fields questions from people almost every day about credit score drops with no apparent reason. Center Director Lori Silverman says that most of the calls and emails they get are from people who have solid credit but are obsessing about a drop of 30 points or less.

5 Reasons Your Credit Score Can Drop Unexpectedly

If you’ve got great credit, a drop like that shouldn’t be a big deal — you’ll still qualify for the best rates,” she says. “However, if you have less than stellar credit and you are hoping to buy a home or car soon, it could be cause for concern.”

In this article, we’ll cover some of the reasons your credit score can go down even if you’re not doing anything “wrong.”

1. You Applied for New Credit 

Applying for new credit can cause your credit score to go down whether or not your application gets approved.

“When a lender or company requests to review your credit report as part of the loan application process, that request is recorded on your credit report as a hard inquiry, and it usually will impact your credit score,” credit bureau Equifax says on its website.

However, there are two pieces of good news here.

The first is that multiple hard inquiries to your report in a short period of time — for example, when you’re shopping for a new home or car loan — should count as only one inquiry.

The second is that, even if your score does get dinged for a hard inquiry, it should affect your score for only a year or two, according to Equifax.

2. You Run Up a Larger Than Normal Balance on Your Credit Cards

Credit utilization plays a huge role in your credit score, so if you make a big purchase on one of your credit cards, it may temporarily ding your credit — even if you pay your bill in full by the due date.

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According to myFICO (which provides the credit scores most often used by lenders), “Amounts Owed” accounts for 30% of your credit score:

A 3D pie chart calculating the 5 categories that make up a credit score including 35% for payment history, 30% for amounts owed, 10% for credit mix, 10% for new credit and 15% for credit history
5 categories that make up your credit score

“A lot of people assume that if they pay their bill in full every month, making a big purchase or charging up more than they usually do won’t affect their score,” Silverman says. “But that’s not the case. It all depends on when your balance gets reported to the credit bureaus. If they see that you owe a larger than the normal amount for you, it will probably hurt your score.”

The good news is that as soon as your spending habits return to normal, your score should bounce back, she says.

3. You (or Your Bank) Closed an Old Credit Card Account

Since the length of your credit history also factors into your overall credit score, closing a card you’ve had for a while can cause a score drop. This is true even if the bank closes your card for you, which can happen if you don’t use the card for a while.

You should be aware that a dip you see in your score could be the result of a card that was closed some time ago.

“When you close a credit card account, your history will eventually fall off your report,” says Beverly Harzog, a credit expert and consumer finance analyst with U.S. News and World Report. “But that could take up to 10 years, so you won’t see a negative impact related to your length of credit history right away.”

The positive news here is that, as long as you’re not canceling all of your longest-held cards, your score will recover over time as the length of your credit history increases.

4. There’s a Mistake on Your Credit Report

Negative remarks on your credit report can damage your score — even if they were placed there in error — according to the National Foundation for Credit Counseling. That’s why it’s so important to check your credit reports regularly.

If you check your report and find an error, take these steps immediately to get it corrected.

Once the derogatory remarks are erased from your report, your credit score should bounce right back.

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5. You Paid Off a Loan

Finally, this one is probably the most vexing to people — and the one the Consumer Action Center gets the most questions about, according to Silverman.

If you pay off a loan — whether it’s a student loan, auto loan, or mortgage — your credit mix can be affected. That mix accounts for 10% of your score, according to myFICO.

That’s why even doing something that you should be proud of, like paying off a loan, can hurt your score.

But don’t let the potential for a little damage to your score prevent you from making a wise financial decision.

“The risk of a little drop in your credit score should almost never be a reason not to pay off a loan,” Silverman says. “The only exception is if you expect to apply for a home or auto loan in the next six months or so. In that case, you might want to wait so that the lenders with whom you’re applying with see the best possible score.”

Final Thought

Money expert Clark Howard doesn’t want you to obsess over your credit score, but you should be in the habit of checking it regularly. If you see a drop in your score even though you’ve been using credit responsibly, one of the things above might be the reason.

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