Introduction
Credit Heroes: Why Did My Credit Score Drop? Have you ever checked your credit score and found that it dropped by 2050 or even 100 points for no reason at all? Well, today I’m going to reveal the causes of these mysterious drops and what you can do about them, so you’d better stick around. When one of these sudden and unexpected credit score drops happens, most people assume it’s a sign of a financial disaster.
They think it’s a major Bank error like the one that almost cost me my house, or they think it’s a sign of fraud, and while that sometimes is the case, more often than not, there’s a simple explanation, and the problem can be easily fixed.
The key is to not panic, and if you act calmly and quickly to review your credit report and identify the cause, you can address the issue and bounce back fast.
How Credit Scores Are Calculated
Here’s how this relates to us for anyone new to Why Did My Credit Score Drop. The factors determining your credit score are usually split into five categories.
- Payment history
- Credit utilization
- Length of credit history
- New credit
- Credit mix.
Changes to any of these factors can cause your credit score to drop.
Common Reasons Why Did My Credit Score Drop
Here are some Most Common Reasons on Why Did My Credit Score Drop. When a drop is sudden and unexpected, there are several common reasons why.
- Reporting Errors
- Unknown Collection Accounts
- Identity Theft
- Credit Utilization
Reason 1: Reporting Errors
The first is a reporting error. 79 percent of all credit reports have errors, and different errors can do different levels of damage to scores.
For example, if a payment was incorrectly reported as late or an account had the wrong balance details, it can cause an unexpected, sudden drop.
Reason 2: Unknown Collection Accounts
The second is an account that you didn’t know about that went to collections. If, for example, you have medical debts that you didn’t know about or thought that your insurance company already paid, your score can take a steep drop when that debt goes to collections.
Reason 3: Identity Theft
The third is identity theft. If someone opens a line of credit in your name, maxes it out, and then doesn’t pay the bill, that’s a serious problem. The sudden drop in your credit score becomes a blessing in disguise because it acts like an alarm, letting you know to review your credit report immediately.
Reason 4: Credit Utilization
The fourth is credit utilization. Other than a reporting error, it’s the most common reason for credit scores to drop unexpectedly. The good news is that it’s the easiest problem to fix.
Real Example of Credit Utilization
An example of this just happened to a friend of mine. My friend recently called me because her credit score dropped 56 points overnight. She said she worked for over a year to boost her score from the 500s to the 700s. She had a few credit cards, but her utilization was below 30 percent. She was paying her bills on time, and she didn’t apply for any new lines of credit.
So we pulled up her three Bureau reports, and we reviewed them, looking for errors and signs of fraud, but everything looked normal except for one thing. One of her credit card balances was much higher than the previous month. In fact, most of her credit cards had zero balances, and the only one with a balance was nearly maxed out.
I asked her about it, and she said she used the card to pay for a trip, but she thought that was okay because she had already made her first month’s minimum payment and her overall utilization was still below 30 percent. Bingo, I explained that even though her overall credit was below 30 percent, that 30 percent was all on one card, and the high credit utilization on the one card was probably the reason why her score dropped.
I warned her about the Trap of making minimum payments, and I helped her to form a plan of action. She adjusted her repayment strategy. I had her apply for credit limit increases on her card, especially that one, and guess what her scores were back above 700 within a month.
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Why Credit Scores Are Sensitive
Here’s the thing to remember: credit scores are very sensitive to certain types of changes. Payment history and credit utilization alone make up two-thirds of your entire credit score. So even if you think you’re doing everything right, all it takes is one or two minor changes to your recent activity to trigger a drop. Although these sudden drops in credit scores can be scary, the sooner you respond and pinpoint the cause and address it, the faster you can recover.
How To Respond To A Sudden Credit Score
Drop
The cause of an unexpected credit score drop determines the solution. If you review your reports, know how credit scores work, identify the cause, and take simple actions to resolve the issue, you can bounce back and avoid any serious long-term effects.
Step 1: Review Your Credit Reports
If you find yourself in a situation where your credit score drops suddenly and unexpectedly, there are five simple steps for how to respond. Step one: Review your credit reports for any new negative items that could drop your score. If you know your credit score dropped, you probably already have access to your most recent credit reports, but if you don’t, you can request free copies at annualcreditreport.com. When you have your reports, compare them and note any changes, increase balances, new late payments, collection accounts, or hard inquiries that you weren’t expecting.
Step 2: Dispute Reporting Errors
Step two: If you notice any reporting errors, even if they aren’t the cause of the unexpected drop, flag them and begin the dispute process immediately. And if you’re thorough, you might end up with a higher credit score than the one that you started with. If you see an error that you don’t know how to dispute, you can scroll through my channel and find a video that tells you exactly how to remove it.
Step 3: Check For Identity Theft
Step three: If you see any suspicious activity, names or addresses that you don’t recognize, or accounts that you don’t remember opening, that may be a sign of fraud or identity theft. And you want to report that immediately. For more information, check out my episode on how to respond to identity theft in eight simple Steps.
Step 4: Reduce Credit Utilization
Step four: Reduce the amount of available credit that you use, also known as your credit utilization. You want to get it below 30 percent overall and reduce it to below 30 percent of each line of credit. Paying down credit card balances and requesting credit limit increases will help reduce your utilization rates.
Step 5: Avoid Applying For New Credit
Step five: Hold off on applying for any new credit until your score recovers to avoid further hard inquiries. Check your credit score monthly to make sure that it rebounds. You should see improvements within one or two billing Cycles.
Final Thoughts on “Why Did My Credit Score Drop?”
If you stay calm, act quickly, and follow these steps, you can minimize any long-term damage and get your credit score back on track fast.Here’s my final point: an unexpected credit score drop can be scary, but with some credit knowledge and a plan of action, you can undo the damage just as fast. Don’t let a minor setback keep you from reaching your credit goals.
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