Your three-digit credit score could be the difference between getting approved for a new financial product with strong terms versus being stuck with sky-high interest rates — or worse, being denied altogether. So it can be incredibly frustrating when you think you’re doing well financially, only to find out your score has dropped.
Credit scores act as a snapshot of your credit history that helps lenders — and often landlords — determine how much risk you run as a borrower or tenant. The better your credit score, the lower your interest rates and the greater your credit limits, while the opposite is true, the lower your score is. But credit scores also change often, and sometimes not for an obvious reason.
“Scores fluctuate constantly depending on how the information in your credit history evolves and changes,” said Rod Griffin, senior director of consumer education and advocacy at Experian.
These are the six most common problems that can lower your credit score, according to Griffin:
1. You missed payments
The most common reason people’s credit scores have dropped is because they missed a payment, Griffin says.
“If you can’t pay a debt as agreed, it will have a negative effect,” he says.
Missing payments are reported to the major credit bureaus as soon as they’re 30 days late, so it won’t affect your credit score if you’re a few days late (although you’ll likely be charged late fees). But failing to make at least the minimum payment after 30 days can seriously hurt your credit score: According to credit loss data from FICO, a person who otherwise never missed a payment can lose more than 80 points after missing a payment for more than 30 days and an additional 50 points after 90 days.
That’s why it’s important to pay at least the minimum required amount each month when the option is available, even if you can’t afford to pay off your entire balance. While you will eventually have to pay the full amount to avoid high credit utilization (more on that later), your payment history is often the most important factor in determining your credit score.
You should also always contact your lender if you are having trouble meeting your mortgage, student loans, or car payments to avoid default. You may be able to reduce your monthly payments or get the loans brought into tolerance, which does not affect your credit score.
2. Your credit utilization rate is too high
Your credit utilization rate is the ratio between how much credit you use and how much credit you use. how much do you have available?. The default goal is to keep your credit utilization rate below 30%. You may have an excellent track record of making payments on time and in full, but if you only have one credit card and use 90% of the total amount, your credit score will suffer.
Griffin advises that borrowers in this situation open another account and split your usage between the two, because “if you put your credit to good use and can keep the usage of both cards low, you’ll likely see the scores improve over time.”
But keep in mind that this strategy can also backfire if you can’t keep the usage of both cards low. Then you will likely lower your credit score because you have maxed out your cards and carry a high balance each month, leading to a high occupancy rate. That’s where making only the minimum payments on your cards may not be enough. You must pay more than the minimum amount if you want to lower your occupancy rate to increase your overall score.
3. You have recently taken out a new line of credit
You may have seen a drop in your credit score if you were recently accepted for new lines of credit. The amount your score actually drops depends on how big the loan is and your overall credit history, but it’s one of the most common reasons people’s scores drop, according to Griffin.
It might not make sense at first glance: You had a good enough score to get a low-interest mortgage loan, so why would it suddenly drop now that you have it? But from a creditor’s perspective, Griffin says that while you may have a good credit history, they have no idea if you’ll continue to make the required payments long term.
The good news is that if your credit score has taken a dip after you approved for a new loanIf you pay consistently over the next few months, it will likely bounce back or even grow as you build a longer credit history.
A widely known fact about building credit is that your score tends to take a hit when a “hard” credit check is done on you, usually when applying for a new line of credit or apartment. But according to Griffin, a credit check alone is unlikely to have a major impact on your overall score — maybe 10 points at most.
“You may see your scores drop a bit at first, but questions are really the least important factor in credit scores and have the least impact,” he says.
If your credit score seems to have taken a significant hit after applying for a new line of credit, then you have “much more serious problems causing your scores to drop than that investigation,” Griffin says.
Consider when was the last time you checked your credit score and your complete credit history before worrying too much about how much an application could affect your score.
4. You recently filed for bankruptcy
It may seem like a no-brainer, but yes, declaring both Chapter 13 and Chapter 7 out of business will definitely have a direct effect on your credit scores.
“Declaring bankruptcy means your scores will drop a lot,” Griffin says. That’s because when you file for bankruptcy, you essentially tell the creditors that you are taking a large credit risk in exchange for getting rid of debt that you will never be able to repay. If you file for bankruptcy with a good credit score, your credit score could drop by more than 200 points.
It will take a lot of time and effort to get your credit score back up to par after filing for bankruptcy, but after seven years, bankruptcy will be removed from your credit report and you can be approved for more credit-boosting financial products.
5. You are looking at a different credit score than usual
The credit score you consult through your bank may not be exactly the same as another provider, even if you check them on the same day. If your credit score seems to have taken a hit, you’ll want to make sure you’re looking at the same score as usual.
The two main companies for consumer credit scoring are: FICO and VantageScore; although they both use the same scale of 300 to 850 to generate scores, the way those scores are calculated may differ. For example, VantageScore takes into account things like your “pattern of behavior” (i.e. making an effort to pay off an existing card balance over time), while FICO scores don’t. But even within one scoring system, there may be differences between your score depending on which scoring model is used.
“It’s crucial that you know what score you’re looking at. Not just if it’s a FICO score, but it’s the same FICO score you’re used to,” says Griffin.
For example, a typical FICO score has a score range between 300 and 850, with 850 being the best possible score. But a car loan lender will often use the specific FICO Auto Score, which goes up to 900 points, so your score may look dramatically different in that report as you prepare to buy a car.
6. You have fallen victim to fraud
If none of the above apply, but your score has dropped significantly, you may want to take a close look at your full credit report for any suspicious activity. Purchases you don’t remember making, loans taken out in your name and maximum credit cards what you never signed up for are big red flags of identity theft.
“Someone maximizing a fraudulent or stolen account can definitely affect your credit score,” Griffin says. “That’s why we always encourage people to check their credit history regularly.”
Unlike most other reasons that could cause your credit score to drop, if you’re a victim of identity theft delete the activity that detracts from your credit report score. But it’s better to detect suspicious activity sooner than later to avoid spending hours verifying the legitimacy of each item in your report.
By enrolling in a free credit monitoring service such as those offered by Experian and Credit Karma, you can track and protect yourself of fraud.
More of Money:
7 Easy Ways to Improve Your Credit Score Now
FICO vs. VantageScore: the difference between credit scores and why it matters
Does Student Loan Debt Affect Your Credit Score?