Your credit score is an essential part of your financial health and a metric you should regularly monitor. Credit scores aren't static, and if you check your credit score regularly with Borrowell, you might notice that it rises and falls by a few points. Your credit score can drop for a wide variety of reasons, some as innocent as missing a bill payment. Other causes may be more insidious, like identity theft.
If you notice that your credit score has dropped, don't panic. We can help you narrow why your credit score dropped and help you rebuild it quickly and efficiently. Here are some common reasons why your credit score may have dropped:
You made a late payment
Your credit utilization ratio is too high
You recently applied for new credit
You cancelled a credit card
Your old credit card got cancelled by your provider
You co-signed a credit application
There's a mistake or error on your credit report
Your unpaid account was sent to collections
You may be the victim of identity theft
To learn more about these credit drop scenarios, and to find some quick tips to improve your credit score, keep reading below.
Want to find out exactly why your credit score dropped?
Borrowell provides weekly credit monitoring and shows you exactly what's impacting your credit score. You can also access your Equifax credit report anytime to look for errors or unusual activity. Sign up for free to get personalized tips.
You Made a Late Payment
Making your monthly payments on time is one of the most significant factors determining your credit score. It accounts for 35% of your credit score, and missed payments can stay on your credit report for seven years. Missed payments lower your credit score, and this applies to a wide variety of credit products, including:
Personal lines of credit
Utilities, like cell phone bills
Department store payment plans
If you've missed a payment or made a late payment on a loan or a credit card, your lender may have reported it to the major credit bureaus. If you are more than 30 days past due on a payment, your lender may register delinquency, which will have a bigger impact on your credit score. You can avoid missed or late payments by setting up automatic payments for all of your bills and credit products.
Your Credit Utilization Ratio is Too High
Your credit utilization rate is the balance on your credit card relative to your overall limit. For example, if you have a $500 balance on a credit card with a $1,000 limit, your credit utilization ratio is 50%. Credit scoring models prefer that you keep your credit utilization ratio under 30%, so it's essential to be mindful not to let your balance creep up over that limit, even temporarily. Credit scoring models take your credit utilization rate very seriously, and it makes up about 30% of your overall credit score.
There are two common ways that your credit utilization ratio can accidentally become too high, resulting in a temporary drop in your credit score. First, if you make a large purchase on your credit card and don't pay it off immediately, that will push your credit utilization ratio over the recommended 30%. To avoid this penalty, pay off your credit card purchases promptly.
The second most common reason for your credit utilization ratio to rise is if your credit limit is lowered. If your total available credit is lowered, your credit utilization ratio will increase. Your lender may lower your limit without warning, bringing you dangerously close to your credit limit and reducing your credit score. If this happens, call your lender and ask them to raise it again.
You Recently Applied for New Credit
The number of credit inquiries (also known as credit checks) on your credit report makes up about 10% of your credit score. There are two types of credit inquiries that impact you in different ways: hard inquiries and soft inquiries. Hard credit checks are performed by lenders when you apply for their products, and they can impact your credit score. Soft credit checks, on the other hand, are performed when you check your own credit score, and they do not impact your score.
Hard credit checks will negatively affect your score for a short time, and many hard credit checks could be a red flag to lenders that you are in financial trouble. Too many hard credit checks on your credit report makes it seem like you’re urgently applying for credit or living beyond your means. Avoid applying for promotional credit products unless you plan to keep them as part of your financial arsenal.
You Canceled a Credit Card
Canceling or closing a credit card will lower your credit score, especially if the credit card was one of your older ones. This is because your credit history makes up 15% of your credit score. Having credit accounts with large ages on your credit report helps you build up your credit history.
If you're looking to avoid credit score drops from canceling a credit card, you should stop using the credit card regularly instead of closing it outright. Most credit cards do not have a fee for inactivity, so there is no downside to leaving the account open with no balance. An unused credit card can also help you keep your credit utilization low, as a zero balance credit card increases your overall credit limit.
Your Old Credit Card Got Cancelled
Old or inactive credit cards can suddenly be cancelled by your provider without prior notice. Credit card providers usually don't make money from your card collecting dust, so they may choose to cancel your credit card and close the account.
An inactive credit card that's been cancelled could hurt your credit score, so you should use the card every once in a while to keep it open and prevent it from getting cancelled by your provider. Use the credit card to make small purchases (like a coffee), auto-pay bills (like a streaming service), or pay for a specific type of purchase (like gas).
You Co-Signed a Credit Application
Co-signing a credit application for a friend or relative is a good deed, but it can negatively impact your credit score. Co-signing does not automatically lower your credit score. However, if the person you co-signed for makes late payments or misses their payments altogether, those missed payments will be reported on your credit history.
Co-signing for a friend or relative is a commitment to pay the debt if they cannot do so themselves. You should avoid putting yourself in this situation unless you can be reasonably sure the borrower will faithfully make their payments.
There's a Mistake or Error on Your Credit Report
Checking your credit score or using a credit monitoring service is a significant first step to ensuring your credit is in good standing. You should also regularly check your credit report to make sure there is no inaccurate information on your file. Credit reports from Equifax and TransUnion offer detailed information about your accounts, their history, and current status. Mistakes do happen, and occasionally a credit reporting bureau will misattribute financial information to your account.
This information could be harmless, or it could be a history of missed payments on an account that isn't yours. You can download your Equifax credit report for free by signing up for Borrowell.
You should review your credit report carefully to ensure there are no errors or omissions. If you find a mistake, dispute the information as soon as possible.
Your Unpaid Account Was Sent to Collections
Your credit score may have fallen because you missed a payment outside of your major financial obligations. These can include phone bills, internet bills, or auto insurance payments.
If you continuously miss payments on a credit product, your lender may send that account to collections. Having an account sent to collections will negatively impact your credit score, so if you find yourself in this situation, it's best to start making payments to the collections agency as soon as possible to bring your account into good standing.
If there were a mistake, you'd need to contact the credit bureau and report the error.
You May be the Victim of Identity Theft
The most problematic reason your credit score could drop is due to identity theft. Identity theft happens when someone uses your identity to open credit accounts in your name.
The easiest way to detect financial identity theft is to request a copy of your credit report from Equifax or TransUnion (you can download your Equifax credit report for free by signing up for Borrowell). Your credit report will list each credit account in your name, along with the account's age and whether it is in good standing. If you notice any accounts or activity you don't recognize, verify first that it isn't misattributed information, and then report the fraud to the appropriate authorities.
Resolving identity theft can be a long process, but once the appropriate authorities handle it and the accounts have been removed from your credit report, your credit score should return to normal.
Quick Tips on Improving Your Credit Score
If your credit score has dropped, rebuilding it should be a priority. Here are easy ways to improve your credit score.
Track Your Bills and Make Automatic Payments
A history of making payments on time will go a long way to improving your credit score. The easiest way to never miss a payment is to make them automatic by either setting up credit card payments or pre-authorized debit transactions. This will pull the amount directly from your chequing account.
You can also use free bill tracking tools to see your upcoming payments and ensure you have enough funds available for each bill.
Keep Your Credit Utilization Ratio Low
Never allow your credit card to accumulate a higher balance than 30% of the total limit. To achieve this ratio, you may need to increase your credit limit or get into the habit of paying for purchases as soon as you incur them.
Only Apply for New Credit When You Need it
Credit card lenders and department store cards are notorious for offering new customers promotions and deals. But applying for that department store credit card you'll only use once will lower your credit score since it requires a hard credit inquiry. Avoid applying for new types of credit unless you really need them.
Keep Your Oldest Credit Card
The longer your credit history, the better your credit score, but you may no longer use that student credit card you applied for ten years ago. Instead of canceling this credit card, ask your lender to convert the credit account to a more useful card or keep the account open with a zero balance.
The Bottom Line
Your credit score is not a static number. It will rise and fall periodically. If you sign up for Borrowell's credit monitoring tool, you'll quickly see that your credit score will fluctuate by a few points from month to month. Borrowell's credit monitoring tool allows you to see your credit score every week and get personalized recommendations on how to improve your credit health. You can also access your credit files anytime and watch for errors or unusual activity, which could indicate identity theft.
Most of the time, small fluctuations are nothing to worry about, but a significant drop could be a sign of trouble. Follow the tips above to keep your credit score as high as possible.
Jordann Brown is a personal finance expert who writes on topics such as debt management, homeownership and budgeting. She is based in Halifax and has written for publications including The Globe and Mail, Toronto Star, and CBC. Jordann is the founder of the popular personal finance blog, My Alternate Life.