What You Should Do If Your Credit Score Suddenly Drops

Credit Score Calculated
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If you check your credit score regularly — and you should — you likely notice that it tends to vary by a few points every month. This is completely normal, and it’s just the product of how credit scores are calculated.

But, if you see a large and sudden change, you may very well ask yourself, “Why did my credit score drop?” Sometimes, the reason for this can be innocuous, and your score will be likely to recover shortly. However, other times your score may drop for a more serious reason, and you may have to work hard over time to get it back up. Here are the 10 major reasons your credit score may drop suddenly, plus what to do if it happens.

You Paid Off a Loan

Make no mistake about it: Paying off a loan is a great long-term way to improve your credit score and keep you out of financial difficulty. But, for a short period of time, you may see a dip in your credit score right after you pay off a loan — particularly if it is an installment loan like a home mortgage or auto loan. This is because part of your credit score is based on the mix of credit account types on your report.

If you pay off your installment loan, it will vanish from your report and you may be left only with credit card accounts. This hurts your credit mix, so it may temporarily drag your score down a few points.

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What to do: In this case, it’s just a waiting game. Don’t let a drop in your credit score prevent you from making the responsible move of paying off that debt. Any dip in your score is usually only temporary. Over time, all other things being equal, your score will recover.

You Missed a Payment

Probably the single most important — and most common — reason your credit score may drop is if you miss a loan or credit card payment. In many cases, you have a 30-day grace period before your late payment is reported to the credit agencies; but, if you violate this threshold, your score will take an immediate hit.

What to do: The only way to recover from this type of credit score drop is to continue making timely payments thereafter. However, this is no quick fix for making a late payment.

You Didn’t Pay Off Your Credit Card Bill Before the Statement Was Issued

Many Americans are in the habit of running up charges on their credit card bills, receiving their statements and then making their payments. But this can actually be causing a drop in your credit score.

Whenever you receive a statement, your creditor will send a record of your outstanding balance to the credit reporting agencies. This will reflect on your credit report as the current amount of your outstanding debt. Even if you pay your balance in full every month after you receive your statement, your credit report will continue to show that you have outstanding debt if your monthly statement shows a balance.

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What to do: If you were to instead pay off your charges as they accrue — or at least pay them all off before your statement date — your creditor will report your statement balance as zero.

You Closed a Credit Card Account

Closing a credit card account can drag your score down in two ways. First, if you close one of your older accounts, it will reduce the average age of your credit. While not a major factor, the age of your accounts is a part of the credit scoring formula, so your score may dip if you reduce that average.

Second, if you have any outstanding balances, closing an account will increase your credit utilization, as the ratio of outstanding debt to available credit lines will increase. This will most definitely hurt your score until you pay down that debt.

What to do: Focus on paying down all existing debts — not just debt on the credit card you closed. This will help decrease your credit utilization rate and bring your score back up.

You Recently Put a Large Charge on Your Credit Card Account

A big part of your credit score is your credit utilization. The more credit you use relative to your available credit lines, the more your score will fall. If you suddenly put a large charge on your credit cards, your credit utilization will increase dramatically, and this could have a significant negative effect on your score.

One way this might catch you off guard is if you buy a new TV, appliance or other product and avail of the store’s deferred interest financing program, in which you may be able to pay off your purchase over a number of years at a 0% interest rate. While this might be financially prudent in terms of avoiding interest charges, it’s also likely to spike up your credit utilization, thereby lowering your credit score.

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What to do: Pay off the purchase as quickly as possible to lower your credit utilization rate as soon as you can.

You Applied for a New Loan

Any time you apply for a loan — even if you get rejected or don’t even use the account after your approval — your score generally will take a small hit. Your credit inquiries get reported on your credit report for two years and, although the effect diminishes over time, every hard credit check counts against you in the credit scoring model

What to do: Only apply for credit that you absolutely need. You also should try to avoid making too many inquiries over a short period of time.

You Got a New Home Mortgage

There’s nothing wrong with living the American Dream and taking out a home mortgage. After all, only a very limited number of Americans can pay cash for a home. But you should be aware that your credit score is likely to go down once you actually take out a mortgage.

For starters, as we’ve seen above, any time you apply for new credit — even a home mortgage — your score will suffer a bit. But, if you actually take out a mortgage, you’ll likely add the largest amount of debt you’ll ever have to your report. Couple that with the high credit utilization rate on that loan at the start — as your loan amount will be the same as your available credit — and it’s not uncommon to see a double-digit drop in your credit score.

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What to do: Don’t stress too much about the temporary ding to your score. Having a mortgage account and consistently paying it on time will actually boost your credit score over the long run.

Your Bank Reduced Your Credit Limit

Sometimes, a reduction in your credit score is beyond your control. Credit card issuers often reduce credit limits for customers who rarely use their cards or show too much existing debt on their credit reports.

However, sometimes they simply reduce credit limits to reduce their overall risk, often in conjunction with economic recessions. If you have an outstanding balance and your creditor reduces your credit line, your credit utilization will go up, which has a negative effect on your score.

What to do: This one is largely out of your control, but the less debt you carry, the more your score will improve, so continue to focus on paying down your existing debts.

You Agreed to a Debt Reduction Plan

If you’re having financial difficulty, you may be able to strike an arrangement with your creditor in which you can settle your debt by paying less than the amount you owe. While this might help dig you out of a financial hole, it can also wreak havoc with your credit score.

Any time you settle a debt — even if it’s to avoid worse scenarios like filing bankruptcy or having your account go to collections — it’s a huge negative in the credit scoring model.

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What to do: If you’re trying to preserve your credit score, settling a debt for less than you owe should be an option of last resort.

There’s a Mistake

Sometimes, if your credit score drops suddenly, it’s simply due to a mistake. Credit reporting mistakes can range from something simple, like a typographical error that a creditor passes on to the agencies, to something more sinister, like a criminal opening an account using your stolen Social Security number.

Either way, if you notice a significant drop in your credit score and haven’t opened any new accounts or made any late payments, a credit report mistake is the likely culprit. This is why it’s essential to monitor your credit reports on a regular basis.

What to do: If you find a mistake on your report, the first step to take is to file a dispute online with a credit bureau. Next, contact your lender and write them a letter explaining the situation. It sometimes takes time for mistakes to be corrected on your report, so keep following up until it’s resolved. Note that the process typically takes 30 to 90 days.

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Gabrielle Olya contributed to the reporting for this article.

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